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Thursday, September 8, 2011

Lewis Wickes Hine The Youngs January 22, 1909 Tifton, Georgia. "Family working in the Tifton Cotton Mill. Mrs. A.J. Young works in mill and at home. Nell (oldest girl) alternates in mill with mother. Mammy (next girl) runs 2 sides. Mary (next) runs 1,5 sides. Elic (oldest boy) works regularly. Eddie (next girl) helps in mill, sticks on bobbins. Four smallest children not working yet. Mother said she earns $4.50 a week and all the children earn $4.50 a week. Husband died and left her with 11 children. Two of them went off and got married. The family left the farm two years ago to work in the mill."

Ilargi: Earlier this week, there was a heart-renditioning comment on Reddit by someone involved -boots on the ground- in the process of evicting people from their homes. Very much recommended reading, see here for the original comment and here for the follow-up. The commenter named his follow-up: Why my job is to watch dreams die. And that got me thinking.

For that is what it often feels like what we do here at The Automatic Earth: we watch dreams die. Only, we see them die -mostly- before the people do whose dreams we watch. That may sound convoluted, but it really isn't. While it may be hard to predict and see what stone may fall next, it is very obvious that the large majority of them will indeed topple over.

There are big dreams, like that of a unified Europe, a dream that is age old, and has been shattered as often as it's been dreamt. This time will be no different. And neither will the consequences be any more bearable.

The German Federal Constitutional Court passed a judgment this week that seems to let Angela Merkel and her people off the hook: all EU bailouts to date passed the threshold of legality. For Merkel though, this is as Pyrrhic as it comes, and the same goes for the financial markets. The court, even as it condoned past actions, put very strict limits on future ones. Future bailouts will be very hard to pass, there will no longer be any last minute grand gestures, and a fiscal union for Europe was swept off the table in one fell swoop.

In case anyone still feels even this can be overcome, Slovakia of all places threatens the Euro project with imminent demise. The chairman of the parliament in Bratislava has said there will be no vote on the lift of EFSF funds until probably December. So even if there's a yes vote, no funds will be available until February 2012. Which is more than Europe can bear at this point in time. There are so many leaks in the system, it's already running out of fingers.

Dutch Finance Minister De Jager sent a letter to his parliament yesterday saying the next chunk of Greek Phase 1 bailout funds will be delayed from mid September to end September at the earliest. Greece is not living up to the conditions put on the bailouts. Not enough austerity. Firing 20% of civil servants is apparently what it will take. Not enough austerity in Italy either, or so we hear.

We could go on for a long time pointing out signs that paint the inevitable picture, but it should be clear by now that Europe is a dream we see die before our very eyes. Swiss bank UBS has an idea what that will likely lead to: "We note that almost no modern fiat currency monetary unions have broken up without some form of authoritarian or military government, or civil war."

The cause of the downfall of the Eurozone? Too much debt. It's no different from that of the people the Reddit commenter evicts from their homes. Too much debt. It's everywhere, and it will devour our societies.

There are other big dreams. Never ending economic growth comes to mind. Or technical progress that lasts forever and can solve all problems caused by .. technical progress. That reminds us of the yeast in the wine vat that die off at the height of their proliferation, not because they run out of wine, but because no organism can survive in a medium of its own waste.

We watch the big dreams die here. But they‘re not what we are most interested in. We care about the dreams of everyday people that are going to be shattered, if they’re not already. In that regard, I often say that what I think is our role can be defined as "minimizing the suffering of the herd". We have no solutions that can carry anyone safely away from the falling debris of our civilizations. The best we can do is to try and point to small ways that might make it all more bearable.

But having your dreams broken to bits will never be easy. And broken they will be if they have anything to do with our financial system, for it is itself broken beyond repair. Too much debt.

Whether you've paid into a pension plan for years only to find out there's nothing of it left, or you want to start a family but don't have a job or a home to live in, whether you want to provide your children with a good, let alone a better, future, your dreams too will be maimed beyond recognition. We are on the verge of entering the most severe credit crunch in history, and there are no easy ways out of it. We wouldn't do too well even if we made all the right choices, and at the same time there's no way we are going to make them.

The MO of our societies, the way we respond to the impending collapse of our systems, is defined by those who owe their very positions to those systems: bankers, captains of industry, media moguls and politicians. Instead of using the remaining resources to minimize suffering, they spend them all in a doomed effort to prop up the existing structures that made them what they are. Most of them don't know any better, and those that do proceed anyway because they think they themselves will be better off that way.

Deutsche Bank CEO Josef Ackermann said earlier this week: "Numerous European banks would not survive having to revalue sovereign debt held on the banking book at market levels." Indeed, neither would numerous American banks. Or pension funds, for that matter. Still, if one would wish to restore confidence in the financial system, marking assets to market is the only way to go.

Mark to market or the market will do it for you. Restructure debt, let those institutions go bankrupt that hold too much debt, and move on. But in no case use any more money that belongs to the people. Use that money to help out the people, minimize their future suffering.

Unfortunately, our societies simply don't have the political structures to make the right choices, or at least those that would serve the people best. Our political structures serve those who hold the power, and they will choose to hold on to that power. The structures allow them to use the people's wealth against the people's best interests. It's perverse, it's insidious, and it's our reality. Voting someone else into power doesn't change these structures one bit.

The people at UBS seem to realize this when they talk of impending civil war in Europe as a consequence of the break-up of the Eurozone. What they don't mention, for whatever reason, is, as Tyler Durden points out, that this will be the end of UBS, too. That seems sort of symbolic for the way many people view the future: they see a lot of negative developments, but a relatively benign position for themselves.

The best we can do is to continue to tell people to get closer to their family and friends, to establish closer communities. But also to stop making plans for decades into the future, because the future has too many embedded uncertainties. And don't expect too much, if anything, from our existing pension, health care and education systems. There will be no funding to keep them going.

So your children will once again be your pension plan, just like they were throughout the ages, and they still are throughout most of the world. They will have to learn their skills from their parents and communities. And yes, that is, provided they live long enough, that they don't succumb to afflictions that today are perfectly treatable but for which no provisions will be available.

We are watching dreams die. Other dreams will take their place. But, given the way the human mind works, it is going to be an epic struggle that many of us won't live to tell.

Germany's constitutional court has at last delivered its Solomonic judgment on Europe's rescue machinery.

It chose to avert Götterdämmerung. The nexus of bail-outs already agreed for Greece, Portugal and Ireland are allowable under Germany's Basic Law - or Grundgesetz - because there is no "automatic" transfer of money beyond the Bundestag's control. Germany may participate in Europe's €440bn (£388bn) bail-out fund (EFSF).

To prohibit the existing rescues would have brought down the temple of monetary union within days, and with it Europe's financial system. The judges did not want a global depression on their conscience. Fears that the court might queer the pitch in some complicated way have been eating at markets for weeks, so Wednesday's relief rally was predictably fast and furious. Germany's DAX index surged 3.7pc and Milan's MIB was up 4.2pc as Italian banks came back from death.

Yet euphoria is surely misplaced. The court's president, Andreas Vosskuhle, cautioned Chancellor Angela Merkel and Brussels to watch their step. "This was a very tight decision. But it should not be mistakenly interpreted as a constitutional blank cheque authorising further rescue measures," he said.

The opinion is a partial victory for the professors who brought the case and fear that Euroland's crisis is dragging Germany across the Rubicon into an EMU debt union without treaty authority or democratic control. Karl Albrecht Schachtschneider, their lead jurist, called the verdict "a bad day for Germany and Europe and a slap in the face of the country". Yet in reality the professors extracted language that kills off any prospect of a debt union, or an EU treasury and fiscal federalism, for the foreseeable future.

"The Bundestag's budget responsibilities may not be transferred through open-ended appropriations to other actors. In particular, no financial mechanisms can lead to meaningful fiscal burdens without prior approval," said the opinion. "No permanent treaty mechanisms shall be established that leads to liability for the decisions of other states, especially if they entail incalculable consequences," it said. The ruling is "a clear rejection of eurobonds", said Otto Fricke, finance spokesman for the Free Democrats (FDP) in the governing coalition.

Above all, the court ruled that the Bundestag's fiscal sovereignty is the foundation of German democracy and that Article 38 of the Basic Law prohibits transfer of these prerogatives to "supra-national bodies". By stating that there can be no further bail-outs for the eurozone without the prior approval of the Bundestag's budget committee, the court has thrown a spanner in the works and rendered the EFSF almost unworkable.

It restricts the ability of Chancellor Angela Merkel to strike rescue deals at EU summits, leaving it unclear how she or any future Chancellor could respond to the sort of crisis that blew up in late July of this year when Italian and Spanish bond yields reached danger levels above 6pc. Moreover, Finland, the Netherlands and Slovakia are all eyeing variants of this legislative veto.

Mrs Merkel is already facing a simmering mutiny in the Bundestag. Up to 25 deputies from her coalition - mostly from the FDP and Bavaria's Social Christians (CSU), but also top Christian Democrats - intend to vote against the revamped EFSF later this month or abstain.

What this reflects is the deeper revolt by German society over escalating rescue costs and the threat to German nationhood. The budget committee is already fractious and is likely to prove tougher with each fresh demand. The question is how will it respond to the disintegration of Greece's rescue programme or if and when Brussels again pushes for a massive boost in the firepower of the EFSF to cope with Spain and Italy.

The path remains strewn with hurdles. Slovakia said it will not debate the EFSF bill until December, delaying activation until February, leaving a very reluctant ECB to hold the fort by purchasing Club Med bonds. Richard Sulik, the president of the Slovak parliament, has vowed to do everything he can to block the EFSF.

Harvinder Sian from RBS said both Athens and the EU-IMF team are likely to keep Greece's programme alive for another quarter, with the risk of a "hard default" in December. He said the sorts of "19th Century colonial demands" now being made on Greece have provoked armed revolutions in the past and might tempt Athens to act first, especially since 90pc of Greek debt is subject to Greek contract law.

The contagion risk remains acute. Portugal is "fundamentally uncompetitive" and carries a debt stock (360pc of GDP) too large for plausible deflation. "Spain is only at the start of a multi-year post bubble adjustment, while Italy has proven ungovernable in the gold-standard world of EMU," said Mr Sian, warning that private investors will not touch the region as long as there is any fear of EMU dissolution.

UBS has even put precise figures on the costs of break-up, deeming the current structure unworkable. "We note that almost no modern fiat currency monetary unions have broken up without some form of authoritarian or military government, or civil war," it said. As long as major banks are uttering such thoughts, this crisis can only rumble on.

Germany’s powerful constitutional court has rejected a series of challenges to the eurozone financial rescue packages agreed last year for Greece and other debt-strapped members of the European currency union.

In an eagerly-awaited judgment issued on Wednesday, the judges in Karlsruhe decided that the measures did not infringe the budgetary authority of the Bundestag, the German parliament in Berlin. But they also ruled that in future the budget committee of the Bundestag must give its prior approval before any further German financial guarantees for loans to its 16 partners in the eurozone.

Andreas Vosskuhle, president of the second chamber of the constitutional court in Karlsruhe, said it was “a very close decision”. “It should not be mistakenly interpreted as a constitutional blank cheque authorising further rescue measures,” he said.

The judgment amounts to an important victory for the German government, although it could complicate negotiations over future crisis measures by reinforcing the parliamentary control of the Bundestag. It lifts a cloud over the €110bn rescue package agreed last year for Greece, and the €440bn European Financial Stability Facility (EFSF) used to provide further financial assistance for both Ireland and Portugal. It should also clear the way for German parliamentary approval for further crisis measures to extend the powers of the EFSF.

Ms Merkel faces a gruelling three weeks to win the backing of her own supporters for new crisis measures, agreed by eurozone leaders last month, which go a lot further than the original plan for Greece.

The package would allow the European Financial Stability Facility – the eurozone rescue fund – to use its funds to buy sovereign bonds in secondary markets, issue precautionary liquidity loans to eurozone members, as well as recapitalise banks in difficulty. It would increase the size of Germany’s financial guarantees for the EFSF from €123bn to €211bn ($297bn).

Carsten Brzeski, senior economist at ING Belgium, said the decision did not amount to a green light for any future rescue package. “Today’s ruling should bring some relief to financial markets as a total chaos scenario has been avoided but it should not lead to euphoria,” he said. “

A bigger say for German parliament in future bailouts could easily find copycats in other eurozone countries, undermining the clout of the beefed-up EFSF,” as well as the permanent European Stability Mechanism to be established from 2014, he added. He said that the ruling should clear the way for the Bundestag to approve the new reforms to the EFSF at the end of September.

A backbench rebellion within Ms Merkel’s centre-right coalition on Monday night saw 19 members of her own Christian Democrat group, and six members of the Free Democratic party – junior partners in the coalition – defy the chancellor’s appeal for parliamentary support.

Top party officials insisted on Tuesday that they still expected to win a government majority on September 29, when the Bundestag must vote on the eurozone package. But if 25 government supporters abstain or vote against, it would deny Ms Merkel a “chancellor’s majority” in the parliament, and lead to opposition calls for an early election.

In a key concession last week, the German government agreed to allow the Bundestag to define its own powers to police eurozone rescue measures in the light of the court’s judgment. Previous judgments by Karlsruhe have sought to reassert the power of the German parliament over European Union legislation, on the grounds that democratic control can only be exercised at national level.

The German government has argued that the Greek rescue package and the establishment of the EFSF were emergency measures necessary to ensure the stability of the euro, implemented as a last resort, and therefore compatible with both EU treaties and the German constitution.

Ms Merkel has faced growing criticism from within her own Christian Democratic Union, after a string of poor results in state elections culminated in a further loss of support in her home state of Mecklenburg-Vorpommern at the weekend. Sunday’s vote saw a clear victory for the opposition Social Democratic party, with 35.7 per cent of the vote, against just 23.1 per cent for Ms Merkel’s Christian Democratic Union. The liberal Free Democrats lost all their seats in the state parliament when their vote slumped from 9 per cent to less than 3 per cent.

The Bundestag will be voting only on the EFSF reforms on September 29, leaving even more controversial decisions on a new Greek rescue package, and a permanent eurozone rescue facility, until later.

Officials say that a vote on the Greek package cannot be held before October, once final details including private sector participation have been agreed with creditors.Ratification of the European Stability Mechanism – the permanent replacement for the EFSF after 2014 – is not expected before December. Opponents of the bail-out proposals argue that the ESM vote will be the most critical of all, because the EFSF is only a temporary measure.

On a web broadcast published on KingWorldNews, he advocates "the classical American way of dealing with this problem"-- complete and total restructuring through Chapter 11. Before its too late.He says, "The only sane way of fixing this and I mean fix it so that Bank of America comes out of the process restructured, ready to support growth, support leverage, is a classic chapter 11..."

His point: Countrywide's bond trusts are worthless, were never properly constructed, and don't protect investors at all. Bank of America is on the hook for all of that, and while its subsidiaries are well capitalized, the parent company is bust. The only thing to do to fix this problem is to unmake $100s of billions worth of bond contracts.

Bank of America can't take that strain as is because it can't touch any subsidiary money to settle its legal claims, so equity holders are going to get wiped out, and bond holders are going to have to take serious haircut.

At least, says Whalen, if the bank files for bankruptcy, it can be saved.

"...we're not going to take the bank down. Bank of America is not going to close. I have all my money in Bank of America, my company, my personal accounts are all at Bank of America, and I have no concern because I know the folks at the FDIC will take care of it if they have to. But I don't think we have to go there."

Because of Countrywide, the biggest mortgage lender in the U.S. and thus the originator of most of the bad loans, Bank of America has the worst fate of the U.S. banks. But other major banks face some degree of pain depending on what comes out of FHFA's lawsuits.

Aside from the "moribund larger banks", Whalen specifically mentioned Allied Bank and Wells Fargo as companies in the danger zone. The rest of the banking sector is free of these massive legacy issues, though, and can continue as is.

So how do we fix the problems at big banks?

1. Repeal the Bank Holding Company Act so that the Federal Reserve isn't on the hook for their debt.

Then we should...

"...allow commercial companies to control depositories. They would be separated (depositories and companies) but I think having new capital, better management, more innovative management, would help the U.S. tremendously. You know, banks aren't special. They aren't supposed to be special...I want to let the private sector take on risk and not put these artificial limits up so that the Fed protects big banks."

You see, to Whalen, the entire point of quantitative easing was to buy time so that banks could restructure. But the big boys haven't been doing it. Instead they, and Washington, have been "treading water" until they're forced to do something (or, in Washington's case, until after election season).

It's a game called "extend and pretend." But increasingly, its looking like the game is now over.

Bank reforms coming into effect over the next decade will destroy the profit-drivers of the world’s largest banks and more than halve industry returns, according to McKinsey.

In a report titled ‘Day of reckoning’, McKinsey paints a bleak picture for banks, estimating that their average pre-regulation return on equity of 20pc will be cut to just seven percent by new capital requirements that will force them to maintain larger buffers against potential losses. Highly-profitable but risky businesses such as proprietary trading, which involves banks trading using their own money, could see their returns fall by more than 80pc.

Even traditional operations such as stock broking where banks acts as the intermediaries between the buyers and sellers of shares are expected to see their returns post the new regulation fall by 40pc, according to McKinsey.

The Basel III rules, which come into full force in 2019, will require banks to maintain a Tier 1 capital ratio of at least 6pc as well as a 2.5pc counter-cyclical capital buffer, more than doubling the amount of capital financial institutions will be required to hold. McKinsey forecasts that about 65pc of the fall in returns will simply be because of the impact of the much higher Tier 1 capital ratio they will have to maintain and expects banks to take radical action to mitigate the cost of the reform.

"Exiting a business completely, through a sale or a wind-down of all assets, is the most severe measure but may be reasonable if regulatory costs cannot be adequately mitigated or shared with customers," said McKinsey.

UK policymakers have begun to sound concerns over the consequences of the new requirements. In a speech this month, Andrew Haldane, executive director of financial stability at the Bank of England, said banks had over-reacted to the crisis and could cut the amount of loss-bearing capital they hold from about 10pc to 7.5pc, closer to the minimum required by Basel III.

Josef Ackermann, the CEO of Deutsche Bank, has said that the current market volatility reminds him of the days immediately preceding the collapse of Lehman Brothers. He also blasted the IMF, saying that calls for the mandatory recapitalization of European banks are "not helpful."

It has been a mere three years since the collapse of the investment bank Lehman Brothers plunged the world into a deep financial crisis. But now, with economic indicators offering little room for optimism, a new crisis may be on the horizon.

That, at least, was the message offered by Deutsche Bank CEO Josef Ackermann on Monday in comments delivered at a conference in Frankfurt. "We should resign ourselves to the fact that the 'new normality' is characterized by volatility and uncertainty," Ackermann said. "All this reminds one of the autumn of 2008."

The volatility was on full display on Monday as the leading German market index, the DAX, plunged to a two-year low and stocks of European banks , including Ackermann's Deutsche Bank, lost value. The price of gold once again spiked upwards as investors sought security.

In addition, the European Central Bank reported that European banks on Friday parked €151 billion ($213.3 billion) overnight with the ECB, the highest total in more than a year. The increase reflects growing distrust on the financial markets, with banks shunning the higher interest rates they would earn by depositing money with each other.

'An Open Secret'Despite his grim message, Ackermann also said that European banks were much better capitalized and less dependent on short-term liquidity than they were on the eve of the financial meltdown three years ago. He added that banks had also managed to reduce the amount of toxic assets on their books and had improved their risk management. But, he added, "it is an open secret that numerous European banks" would run into trouble were they forced to write down their sovereign bond holdings to reflect current market value.

Ackermann also once again blasted International Monetary Fund President Christine Lagarde for her suggestion that European banks submit to forced recapitalization. He said such calls were "not helpful" and suggested that they threatened to undermine European efforts to assist crisis-stricken euro-zone members. He said that a forced recapitalization would send the message that the European Union had little faith in its own strategy for saving the common currency. In comments last week, Ackermann said that he "thinks nothing at all" of Lagarde's demand for recapitalization.

'A Dangerous Illusion'The Deutsche Bank CEO said that his own bank was well positioned for difficult times, though he said that he would consider reducing costs should the situation continue to deteriorate. He also urged further European integration and warned against the collapse of the euro zone.

"The costs of supporting weak member states, particularly from the German perspective, are less than the costs of disintegration," he said. "It is a dangerous illusion to believe that a country could do better should it reclaim the sovereignty it has delegated to the EU." Ackermann's speech on Monday was delivered at a conference entitled "Banks in Transition," organized by the German business daily Handelsblatt. The CEOs of Germany's Commerzbank, France's Societe Generale and Italy's UniCredit were also scheduled to speak on Monday and Tuesday.

Any time a major bank releases a report saying a given course of action is too costly, too prohibitive, too blonde, or simply too impossible, it is nearly guaranteed that that is precisely the course of action about to be undertaken. Which is why all non-euro skeptics are advised to shield their eyes and look away from the just released report by UBS (of surging 3 Month USD Libor rate fame) titled "Euro Break Up - The Consequences."

UBS conveniently sets up the straw man as follows: "Under the current structure and with the current membership, the Euro does not work. Either the current structure will have to change, or the current membership will have to change." So far so good. Yet where it gets scary is when UBS quantifies the actual opportunity cost to one or more countries leaving the Euro. Notably Germany.

"Were a stronger country such as Germany to leave the Euro, the consequences would include corporate default, recapitalisation of the banking system and collapse of international trade. If Germany were to leave, we believe the cost to be around EUR6,000 to EUR8,000 for every German adult and child in the first year, and a range of EUR3,500 to EUR4,500 per person per year thereafter. That is the equivalent of 20% to 25% of GDP in the first year. " It also would mean the end of UBS, but we digress.

Where it gets even more scary is when UBS, like many other banks to come, succumbs to the Mutual Assured Destruction trope made so popular by ole' Hank Paulson : "The economic cost is, in many ways, the least of the concerns investors should have about a break-up. Fragmentation of the Euro would incur political costs. Europe’s "soft power" influence internationally would cease (as the concept of "Europe" as an integrated polity becomes meaningless).

It is also worth observing that almost no modern fiat currency monetary unions have broken up without some form of authoritarian or military government, or civil war." So you see: save the euro for the children, so we can avoid all out war (and UBS can continue to exist). The scariest thing, however, by far, is that for this report to have been issued, it means that Germany is now actively considering dumping the euro.

Executive summary:

Fiscal confederation, not break-up Our base case with an overwhelming probability is that the Euro moves slowly (and painfully) towards some kind of fiscal integration. The risk case, of break-up, is considerably more costly and close to zero probability. Countries can not be expelled, but sovereign states could choose to secede. However, popular discussion of the break-up option considerably underestimates the consequences of such a move.

The economic cost (part 1) The cost of a weak country leaving the Euro is significant. Consequences include sovereign default, corporate default, collapse of the banking system and collapse of international trade. There is little prospect of devaluation offering much assistance. We estimate that a weak Euro country leaving the Euro would incur a cost of around EUR9,500 to EUR11,500 per person in the exiting country during the first year. That cost would then probably amount to EUR3,000 to EUR4,000 per person per year over subsequent years. That equates to a range of 40% to 50% of GDP in the first year.

The economic cost (part 2) Were a stronger country such as Germany to leave the Euro, the consequences would include corporate default, recapitalisation of the banking system and collapse of international trade. If Germany were to leave, we believe the cost to be around EUR6,000 to EUR8,000 for every German adult and child in the first year, and a range of EUR3,500 to EUR4,500 per person per year thereafter. That is the equivalent of 20% to 25% of GDP in the first year. In comparison, the cost of bailing out Greece, Ireland and Portugal entirely in the wake of the default of those countries would be a little over EUR1,000 per person, in a single hit.

The political cost The economic cost is, in many ways, the least of the concerns investors should have about a break-up. Fragmentation of the Euro would incur political costs. Europe’s "soft power" influence internationally would cease (as the concept of "Europe" as an integrated polity becomes meaningless). It is also worth observing that almost no modern fiat currency monetary unions have broken up without some form of authoritarian or military government, or civil war.

A little more on that particularly troubling last point:

Do monetary unions break up without civil wars? The break-up of a monetary union is a very rare event. Moreover the break-up of a monetary union with a fiat currency system (ie, paper currency) is extremely unusual. Fixed exchange rate schemes break up all the time. Monetary unions that relied on specie payments did fragment – the Latin Monetary Union of the 19th century fragmented several times – but should be thought of as more of a fixed exchange rate adjustment. Countries went on and off the gold or silver or bimetal standards, and in doing so made or broke ties with other countries’ currencies.

If we consider fiat currency monetary union fragmentation, it is fair to say that the economic circumstances that create a climate for a break-up and the economic consequences that follow from a break-up are very severe indeed. It takes enormous stress for a government to get to the point where it considers abandoning the lex monetae of a country. The disruption that would follow such a move is also going to be extreme. The costs are high – whether it is a strong or a weak country leaving – in purely monetary terms. When the unemployment consequences are factored in, it is virtually impossible to consider a break-up scenario without some serious social consequences.

With this degree of social dislocation, the historical parallels are unappealing. Past instances of monetary union break-ups have tended to produce one of two results. Either there was a more authoritarian government response to contain or repress the social disorder (a scenario that tended to require a change from democratic to authoritarian or military government), or alternatively, the social disorder worked with existing fault lines in society to divide the country, spilling over into civil war. These are not inevitable conclusions, but indicate that monetary union break-up is not something that can be treated as a casual issue of exchange rate policy.

Even with a paucity of case studies, what evidence we have does lend credence to the political cost argument. Clearly, not all parts of a fracturing monetary union necessarily collapse into chaos. The point is not that everyone suffers, but that some part of the former monetary union is highly likely to suffer.

The fracturing of the Czech and Slovak monetary union in 1993 led to an immediate sealing of the border, capital controls and limits on bank withdrawals. This was not so much secession as destruction and substitution (the Czechoslovak currency ceased to exist entirely). Although the Czech Republic that emerged from the crisis was considered to be a free country (using the Freedom House definition), with political rights improving relative to Czechoslovakia (also considered to be a free country), Slovakia saw a deterioration in the assessment of its political rights and civil liberties, and was designated "partially free" (again, using Freedom House criteria).

Similarly the break-up of the Soviet Union saw authoritarian regimes in the resulting states. Of course, this was not a change from the previous status quo, but that is not the point. The question is not how a liberal democracy develops, but whether a liberal democracy could withstand the social turmoil that surrounds a monetary union fracturing. We lack evidence to support the idea that it could.

Even the US monetary union break-up in 1932-33 was accompanied by something close to authoritarianism. Roosevelt’s inauguration was described by a contemporary journalist as being conducted in "a beleaguered capital in wartime", with machine guns covering the Mall. State militia were called out to deal with the reactions of local populations, unhappy at what had happened to the monetary union (and specifically their access to their banks).

Older examples are less helpful, as they tend to be more akin to fixed exchange rate regimes under a gold standard or some other international monetary arrangement. Nevertheless, the Irish separation from the UK, or the convulsions of the Latin Monetary Union in Europe (particularly around the Franco-Prussian war in 1870 and its aftermath) saw monetary unions fragment with varying degrees of violence in some parts of the union.

Writing in 1997, the Harvard economist Martin Feldstein offered a view that seems to be somewhat chillingly precognitive. He said "Uniform monetary policy and inflexible exchange rates will create conflicts whenever cyclical conditions differ among the member countries... Although a sovereign country... could in principle withdraw from the EMU, the potential trade sanctions and other pressures on such a country are likely to make membership in the EMU irreversible unless there is widespread economic dislocation in Europe or, more generally, a collapse of the peaceful coexistence within Europe."

As for what happens if UBS, and the Euro Unionists lose the fight for the euro:

Our base case for the Euro is that the monetary union will hold together, with some kind of fiscal confederation (providing automatic stabilisers to economies, not transfers to governments). This is how the US monetary union was resurrected in the 1930s. It is how the UK monetary union, and indeed the German monetary union, have held together.

But what if the disaster scenario happens? How can investors invest if they believe in a break-up, however low the probability? The simple answer is that they cannot. Investing for a break-up scenario has not guaranteed winners within the Euro area. The growth consequences are awful in any break-up scenario. The risk of civil disorder questions the rule of law, and as such basic issues such as property rights. Even those countries that avoid internal strife and divisions will likely have to use administrative controls to avoid extreme positions in their markets.

The only way to hedge against a Euro break-up scenario is to own no Euro assets at all.Alas, this will be the final outcome. Unfortunately trillions more in taxpayer capital will be lost before we get there. In the meantime, enjoy as UBS just unwittingly announced the final countdown for the EUR.

Analysis by UBS delivers stark warning to eurozone members of the cost of a breakup of the single currency area

Greece or Portugal would lose up to 50% of their national income if they quit the euro, according to research by analysts at Swiss investment bank UBS. A eurozone country with a more robust economy, such as France or the Netherlands, would see 20% to 25% of national income disappear if they went back to operating their own currency.

For Greece the loss would be $165bn (£100bn) from its $330bn annual gross domestic product, while France would suffer a loss of $660bn from its $2.65 trillion annual GDP. The stark warning to eurozone members that a breakup of the euro currency club will cost them dear follows several speeches by policymakers and economists that the status quo is untenable.

German chancellor Angela Merkel has dismissed talk of a breakup, but has struggled to articulate a coherent alternative currency union that would include Greece and Portugal, the two ailing countries most likely to face eviction. In Brussels, commission staff are busy working on plans for a closer fiscal and monetary union built around eurozone members, with stricter limits on borrowing and tighter banking regulations.

However, the slow pace of reforms in Greece and determined resistance in Italy to further austerity, has undermined moves for a closer union. UBS said: "Under the current structure and with the current membership, the euro does not work. Either the current structure will have to change, or the current membership will have to change.

"If Germany were to leave, we believe the cost to be around €6,000 (£5,250) to €8,000 for every German adult and child in the first year, and a range of €3,500 to €4,500 per person per year thereafter. That is the equivalent of 20% to 25% of GDP in the first year. In comparison, the cost of bailing out Greece, Ireland and Portugal entirely in the wake of the default of those countries would be a little over €1,000 per person, in a single hit.

UBS analysts Paul Donovan and Stephen Deo also fear wider political ramifications. "There are also political costs to consider. Europe's 'soft power' influence internationally would cease. We note that almost no modern fiat currency monetary unions have broken up without some form of authoritarian or military government, or civil war."

The economist Nouriel Roubini has long argued the costs of forcing ailing countries to maintain their membership of the euro could have even higher costs. Greece, Portugal and Italy could face a decade-long depression and political upheaval inside the euro, while the costs of a swift exit could be wiped out by strong growth with an independent currency.

A steep new decline in U.S. stock markets Tuesday underscores a rising risk for the nation’s economy: that Europe’s fiscal troubles will spread across the Atlantic and weaken growth on these shores. The Standard & Poor’s 500 was down 2 percent at noon Tuesday, even as the only news about the U.S. economy since Friday was a surprisingly positive report about the nation’s service sector.

The markets were instead responding to the growing financial instability in Europe, where stocks plummeted more than 5 percent in an alarming sell-off on Monday, the Labor Day holiday in the United States. Investors are increasingly fearful that the economies of Europe’s largest countries, particularly Germany, are slowing, and that the governments on the continent will not be able to agree on measures to avert a deeper crisis.

In effect, the value of the U.S. corporate sector--and by extension, Americans’ wealth and business confidence--is being determined by events in Brussels, Frankfurt, Rome and Berlin.

Indeed, this is not the first time there have been signs that Europe’s troubles are having an outsized impact on the United States’ own financial stakes. It was in the spring of 2010 that the U.S. economy seemed to be finally taking off--only to falter at exactly the time the European crisis became more severe. Similarly, as the European situation has become more dire in the early months of this year, growth in the United States slowed once again.

The $240 billion worth of goods and services that the United States exported to Europe last year amounts to only 1.6 percent of U.S. economic activity. But the events of the last year show how the links, particularly through financial markets, are far greater than that number would suggest.

Global investors increasingly view risk in binary terms: When things are looking calmer on the global economic front, stock markets rise across the world; when things look scarier, they fall. Instead of differentiating among the economies in the United States, Europe and Japan, market measures are moving closely in tandem.

Moreover, because major U.S. companies have operations around the globe, executives are more likely to try to offset weakness in their overseas operations by pulling back on hiring and capital investment domestically, even if the U.S. economy is proceeding apace. More than ever, in other words, Europe’s problems are our problems.

Slovak lawmakers will reconvene here Tuesday after their summer break, but a critical piece of legislation will be conspicuously absent from the agenda: A bill to widen the role of a euro-zone rescue fund. Parliament Speaker Richard Sulik said he will do everything he can to delay a vote on the measure—passage of which is necessary for the common currency bloc to move ahead with plans to strengthen the financial safety net for the euro's weakest members.

As speaker, Mr. Sulik has significant power in setting Parliament's legislative agenda. "It's not possible to solve a debt crisis by creating new debts," Mr. Sulik said in an interview Friday, in which he made clear his opposition to any expansion of the European Financial Stability Facility. He pledged to postpone a final vote on the measure until at least the end of the year.

The delay is one of a growing list of potential disruptions that is vexing European policy makers and unsettling markets, which are anxious about precarious state finances in Greece and Italy and are questioning the political resolve of euro-zone governments. On Monday, Slovakia's finance ministry issued a statement calling on Parliament to speed up a vote, which many observers expect would result in passage of the bill, saying that waiting would be "counterproductive in the current circumstances."

Jean-Claude Trichet, president of the European Central Bank, also said Monday that there is an "immediate need" for action to implement the bailout plans agreed to by euro-zone national leaders in July. But growing opposition in legislatures across Europe appears to make that unlikely. Finnish lawmakers, for example, are insisting that their country get collateral for any additional loans to Greece, sparking calls for equal treatment by other nations. A solution to that dispute may not come until a meeting of euro-zone finance ministers on Sept. 16.

Driving resistance to the latest round of crisis measures is growing anger among politicians—and their constituents—in stronger euro-zone nations who feel they are being asked to subsidize the citizens of states that have been borrowing and spending beyond their means.

For many in Slovakia, the second-poorest member of the euro zone—Estonia is the poorest—the idea of bailing out nations that are considerably richer is especially galling. Slovaks shouldn't be asked to help rescue Greece, said Maria Cikhtova, who works at a small dry-cleaners in downtown Bratislava. "It's not fair. It's their debt. They should pay for it," said Ms. Cikhtova. "They are on strike all the time. They're not doing anything." Ms. Cikhtova, who is 52 years old, said she earns about €500 ($710) a month before tax. "Before we joined the euro, the government had to cut spending a lot," she said. "They should have to do that, too."

Mr. Sulik, the speaker of Parliament and head of one of the four parties in Slovakia's coalition government, said such popular opposition has stiffened his own resolve against the new bailout measures, which he said amount to "trying to put out a fire with a fan." The only real solution to the debt crisis, Mr. Sulik said, is rigorous enforcement of the currency bloc's regulations on budget deficits and public debt—not extending more loans. "The more we let countries violate the rules, the worse things will get," he said. "Greece has to go into bankruptcy."

The speaker's position has put him at odds with Slovak Prime Minister Iveta Radicova and her party, which supports adoption of the new measures. That represents a shift for a government that last year was slow to sign off on the establishment of the EFSF, and that refused to participate in a separate bailout loan for Greece.

Mr. Sulik's views, however, haven't changed. He said strict adherence to limits on everything from budget deficits to inflation rates was required of Slovakia before it was admitted to the euro area at the beginning of 2009. "Now when I see what is being allowed for Greece and Italy, it really makes me angry," Mr. Sulik said. "We have to pay because of this double standard. It's a real injustice."

The game is up for Greece as there is surely no way back for the country and a rapid Euro exit is increasingly likely. Without decisive action, the Euro is also likely to come under increasingly severe selling pressure as the financial crisis spreads.

In theory, the EU and IMF can continue to provide the funds agreed under the existing bailout programme, but this will only delay the inevitable as on the current trajectory Greek public debt is likely to be at least 180% of GDP next year. The collateral row also illustrates how difficult it will be to keep EU members on board and willing to contribute to the planned second bailout package. Indeed, there is a high risk that the second bailout will unravel within the next few days.

Greece will have to reflate its economy and default on its sovereign debt to help secure a medium-term recovery and this will not be possible within the Euro-zone. It is increasingly likely that Greece will be sacrificed politically and economically in an attempt to keep the rest of the Euro area intact and aim for a more orderly move towards greater fiscal union even though this may be politically impossible.

The market’s vote of no confidence in Greece and the bailout package could hardly be clearer as Greek bond yields rise exponentionally, at one point the 2-year yields rose to a staggering 55% on Monday. The only question now appears to be the timing and method of Euro exit. Greece can either make the decision itself or it will effectively be forced out by the other members.

The decision could be taken out of Greece’s hands by the German constitutional court which will rule on Wednesday whether the EU bailouts were legitimate under German Law. If the court rules unambiguously that the bailouts were unconstitutional then the Euro-zone in its current form would have no chance of survival as the peripheral countries would come under immediate and terminal attack. A more complex and less clearly defined ruling looks the more likely outcome which would demand additional guarantees for future aid.

Such an outcome would also create market uncertainty and confusion. It would also make life even more difficult for Greece, but would not be decisive enough to force am immediate exit. More importantly, it would intensify political tensions in Germany as Chancellor Merkel would find it even more difficult to gain parliamentary support for an expanded EFSF as domestic opposition would increase further.

Tensions are flaring throughout the Euro area as Italian bond yields rise even with the support of ECB buying. Last week, the ECB almost doubled its buying of peripheral bonds as they bought EUR13.3 compared with EUR6.7bn the previous week. Italian yields have still increased back to the 5.50% area and credit-default swaps also rose sharply on Monday. European banking stocks were also sold very heavily during Monday.

The ECB is clearly extremely frustrated with the situation and has warned Italy not to slide on austerity measures in expectation that the ECB will prevent any market fall-out. The Italian government will continue to debate austerity measures on Tuesday at the same time as a General Strike has been called and the domestic willpower looks shattered.

The political and economic developments appear to have a surreal quality with key political players calling for action to stem the crisis, but simply insisting that measures agreed previously need to be implemented in full and more quickly. The calls for austerity in the face of recessionary conditions and rising debts will simply not work as the outcome will be for a further increase in debt and even weaker growth while political support will crumble.

In this environment, it is far from clear that the European authorities will be able to prevent a more substantial break-up of the Euro area. If Greece leaves the Euro, Portugal and Ireland would have great difficulties staying in while Italy would also be extremely vulnerable.

The only logical policy is for Europe to chop away as much of the periphery as is required to stop the infection from destroying the core. If they act quickly and promise more fiscal co-operation, then the casualty list may be small. The longer a decision is delayed, the more likely it is that countries such as Italy will also be forced out of the Euro area with the emergence of a two-tier Euro area.

Workers marched in Italy and Spain on Tuesday to protest planned spending cuts as new data confirmed fears of an economic slowdown across Europe. Regional stock markets dropped for a third day, with some having lost about 10 percent of their value since Friday. After a sharp sell-off Monday to start the week, the Stoxx 50 index of euro-zone companies shed another 1.8 percent on Tuesday.

U.S. stocks also slid for the third straight day on Tuesday, though they rose above the day’s lows in a late-afternoon rally. The Dow Jones industrial average closed down nearly 1 percent; the Standard & Poor’s index was down 0.74 percent; and the Nasdaq index dropped 0.26 percent.

The White House said on Tuesday that it was confident that Europe would be able to manage its growing debt crisis. "The Europeans face a difficult challenge but we believe they have both the ability and the will to meet those obligations," White House spokesman Jay Carney said during his press briefing. He said President Obama and senior aides had been in regular consultations with their European counterparts on the matter.

The market declines reflect widening concerns around the euro-area economy, as governments battle a complicated and interconnected set of problems that have confounded them for nearly two years. The situation has caused leading analysts to compare the environment to the months leading up to the 2008 collapse of Lehman Bros., and warned that a fragile global economy could not stand another financial crisis of that magnitude.

But the sense of instability is clear, from the streets of European capitals clogged with striking workers to the offices of central banks. Officials at the Swiss National Bank surprised markets Tuesday by slapping a new fixed minimum exchange rate of 1.20 francs to the euro. The Swiss have been struggling to curb their soaring currency, which has become a haven amid jitters over the euro and which threatened the Swiss economy by driving up the price of the country’s exports.

Some analysts feared a disruption in currency markets if other nations take similar measures to keep their currencies from rising as the dollar and the euro slump. The Swiss bank warned that it was prepared to buy massive amounts of foreign currency to support the new minimum exchange rate. The Swiss franc fell nearly eight percent against the euro for the day.

In Washington, the trade group representing major financial companies said it had become increasingly worried that new regulations meant to strengthen the banking system were undercutting economic growth. The Institute of International Finance said in a major study that the new banking rules, set by a committee of world central bankers convened out of Basel, Switzerland, are forcing banks to boost their capital and cash levels at a time when the economy needs stronger credit growth.

Because of the mistrust that is building, particularly in the European banking system, that capital is becoming increasingly expensive to raise — another drag on bank profits, performance and lending.

Even as the Federal Reserve Bank loosens the U.S. money supply to try to boost the nation’s economy, the bank capital rules are pushing institutions to be more conservative, said IIF managing director Charles Dallara. n"It is essential to find the right balance in this process, especially at a time of pronounced economic weakness," Dallara said.

Updated statistics showed that growth in the 17-nation euro area dropped sharply from April through July, when the region’s economy expanded just 0.2 percent compared with 0.8 percent for the first three months of the year. German factory orders fell in July, also confirming a slowdown in the area’s largest economy.

Analysts said the measures that make up the gross domestic product show that more contraction on the way: Household spending is expected to continue falling as governments cut budgets, slash public sector payrolls and take other steps to trim deficits; exports, the one bright spot for countries such as Spain and Ireland, are also beginning to dip as the world economy slackens. The data cast "further doubt on the region’s ability to grow its way out of the debt crisis," Ben May, European economist for Capital Economics, wrote in an analysis of the latest figures.

The strikes in Italy and Spain were aimed at an array of government efforts to control public debt and maintain confidence that the two countries will be able to pay their bills without the international bailout of the sort that Greece, Portugal and Ireland required this year. Italy, in particular, would strain the available euro-area resources if it needed to be rescued.

The Italian Parliament is debating how to trim its budget by $60 billion, and union members said they wanted to protect the social programs and benefits built up for Italian workers. Talks also continued Tuesday in Berlin over an expanded rescue program for Greece. Accepted in principle at a July 21 meeting of euro-area leaders, the program is foundering on a demand by Finland that Greece post collateral for its share of an upcoming emergency loan.

Failure of the 17 euro-area parliaments to approve the new program for Greece could put the country again at risk of default, which would threaten the many European banks that have loaned money to the Greek government.

The pursuit of austerity measures and deficit cuts is pushing the world economy toward disaster in a misguided attempt to please global financial markets, the annual report of the United Nations economic thinktank UNCTAD said on Tuesday.

The report, entitled "Post-crisis policy challenges in the world economy," savaged U.S. and European economic policies and called for wage increases, stricter regulation of financial markets, including a return to a system of managed exchange rates, and a conscious break with market-led thinking. "The message here is very pragmatic: we need to reverse our course quickly," said UNCTAD Secretary General Supachai Panitchpakdi.

Supachai, a former head of the World Trade Organization, said the policy response to the crisis, with an emphasis on fiscal tightening, was misconceived and inept. The report's lead author Heiner Flassbeck said the global economic situation was extremely dangerous and, without more stimulus, a decade of stagnation was the best-case scenario. The current policies were a disaster, said Flassbeck, head of the globalization and development strategies division at the U.N. Conference on Trade and Development, and a former deputy finance minister in Germany.

"If interests rates everywhere are zero, and if governments stick to the policy of not only keeping fiscal deficits where they are but retrenching, cutting public expenditure, then we will end up in permanent recession," he said. "Unemployment depends very much on demand. And if you have no demand then you need government to step in with a huge program for stimulating the economy. This was the U.S. scenario in the past. Now it's worse because wages are rising less than in the past so you're going to need a bigger stimulus program."

The recovery from the financial crisis was not only jobless, which was to be expected, but it was also "wageless," he said, with Americans, Japanese and Europeans -- 70 percent of the world economy -- expecting their incomes to stagnate. In its last report a year ago, UNCTAD said a premature removal of stimulus policies might cause a deflationary spiral with attendant slumps in growth and employment around the world.

"Let's not fool ourselves. This is a realistic scenario for the whole developed world, if we do not understand the lessons now, and really quickly, because we do not have other instruments any more," Flassbeck told a news conference to launch this year's report. "To revive the economy with a wageless recovery with diminished expectations by the private economy, by private households, what are the instruments at hand? There is nothing." He said that even if things go well, global economic growth would slow to about 1.5 percent in 2012, less than half the U.N. forecast of 3.1 percent growth for this year.

Herd MentalityThe report put much of the blame for the crisis on deregulation of financial markets, which it said invited destabilizing "herd behavior" by speculators, and allowed an over-concentration of banking activities. "What we've seen in the past and we never learn is that countries seem to have excessive belief in the financial markets. And we've seen time and again that financial markets are not very sound in their judgment," said Supachai.

"But still people keep thinking that they are doing these austerity measures because they want to please the markets so that the markets give them better ratings, including the rating agencies which do not always produce the best assessment."

Flassbeck said the herd mentality was evident whenever equity markets and commodity markets all lurch in tandem on the same day, an effect that could not conceivably be caused by real swings in demand. But the world was ignoring it, he said. "If the G20 negotiations were not confidential I would tell you that it's ignored even there," he said.

A November summit of the 20 biggest economies would reach "extremely weak" conclusions on tackling the crisis and would underestimate the influence of financial markets, he said. "We have three areas where the G20 wanted to be strong. The first is the coordination of economic policy: nothing. The second is commodities speculation: more or less nothing; and the third is international global monetary order: nothing. So that's the result of nine months deliberation by the G20."

The U.N. report said the world should introduce a system of rules-based floating exchange rates, which would kill off distorting "carry trades" in which investors borrow currencies with low interest rates to buy higher-yielding currencies. The system would be based on divergences between the consumer prices or interest rates applicable to different currencies, and unlike the defunct Bretton Woods system, it would cater for continual adjustments in exchange rates.

Josef Ackermann, the chief executive of Deutsche Bank, Germany's biggest bank, has warned that "numerous" European lenders would collapse if they were forced to book their losses on stricken sovereign bonds.

Mr Ackermann said that the value of billions of euros of loans has plunged to a level that could overwhelm smaller banks. He told a conference in Frankfurt: "Numerous European banks would not survive having to revalue sovereign debt held on the banking book at market levels." Mr Ackermann said market conditions were as febrile as the height of the banking crisis. "We should resign ourselves to the fact that the 'new normality' is characterised by volatility and uncertainty," he said. "All this reminds one of the autumn of 2008."

The volatility was demonstrated as Deutsche Bank shares tumbled 8.9pc as banks led a stock markets lower across Europe. Deutsche Bank's shares closed at €23.79, valuing the company at €21.6bn (£18.9bn) - its lowest level since it completed a €10.2bn rights issue last October. The Stoxx Europe 600 banking index fell to its lowest level for 29 months. The DAX fell to its lowest level in two years.

Traders said fears over the banks' exposure to European debt were exacerbated by the uncertainty of the US legal cases and regulatory reform. The debt crisis has also squeezed bank revenues as mergers and acquisitions – as well as stock market listings – have been shelved. Trading figures have also fallen. Mr Ackermann said that bank profits will take a long time to recover.

"Prospects for the financial sector overall... are rather limited," he said. "The outlook for the future growth of revenues is limited by both the current situation and structurally."

Deutsche Bank has already warned that it could miss its target of €6.4bn pre-tax profits this year without a quick and sustainable resolution of the European debt crisis. Even so, Mr Ackermann firmly rejected the proposal by Christine Lagarde, the new head of the International Monetary Fund, for another round of recapitalising European banks.

Mr Ackermann claims that the move would be "counterproductive" and argued that "a forced recapitalisation would give the signal that politicians do not themselves believe in the measures" they have implemented to bolster fragile eurozone countries.

Ms Lagarde has said banks need another capital injection to "avert contagion". She told reporters she believed it is "necessary to recapitalise European banks so that they are strong enough to withstand the risks linked to the debt crisis and weak growth".

As the stock and bond markets seem eerily similar to the dark days of 2008, Jean-Claude Trichet and Mario Draghi, the current and incoming chiefs of the European Central Bank, pointedly urged European leaders to move quickly to ensure that the euro zone’s debt crisis does not become seriously worse.

Europe needs to "make a quantum step up in economic and political integration," Mr. Draghi said as the bond yields of Greece, Italy and other countries with weak finances jumped Monday amid investor fears that such efforts might be failing. He and Mr. Trichet addressed a forum in Paris that focused on the world three years after the collapse of Lehman Brothers.

President Obama will deliver a jobs speech on Thursday, a day before the Group of 7 wealthiest nations meet in Marseille to discuss the European and American economies. Washington wants to make sure that headwinds from Europe’s crisis do not cross the Atlantic while the United States economy remains weak.

Mr. Draghi’s call goes to the heart of what politicians now acknowledge is a root cause of Europe’s crisis, but that few seem ready to change: the lack of a federal fiscal union that would make the euro zone look more like the United States. The idea is something that Germany and others are wary of because it could undermine their national authority.The calls for what defenders of sovereignty have called the "F word" — federalism — are growing louder, however, as investors warn that volatile financial markets are starting to look similar to the days surrounding Lehman Brothers’ collapse.

Mr. Trichet, who turns over the central bank presidency to Mr. Draghi at the end of October, renewed calls for a federal European government, with a federal finance ministry. Those institutions would have the power to "impose decisions on countries" whose own policies threaten the rest of the euro union, Mr. Trichet said at the Paris conference, sponsored by the Institut Montaigne, a research group.

In Brussels, meanwhile, an unusual gathering of former European leaders, academics and industrialists urged politicians to recognize that part of the answer to Europe’s ills was to give up some sovereignty to keep the euro alive.

"It has become clear that a monetary union without some form of fiscal federalism and coordinated economic policy will not work," the group said in a statement. Its members include a former German chancellor, Gerhard Schröder; a former Finnish prime minister, Matti Vanhanen; and Nouriel Roubini, a New York University economist. "Either the Europeans move forward," Mr. Roubini said, or face "a situation of potential breakup or disintegration."

Benoit d’Anglelin, a former Lehman banker for 15 years who is now a manager at Ondra Partners, a financial advisory firm in Paris, said he was seeing "extreme risk aversion now" by pension funds and institutional investors, who have been dumping "everything risk-related," since March. "It’s becoming unsustainable," Mr. d’Anglelin said. "Imagine what will happen if the selling gets more serious."

Despite pledges by European leaders in July to pump billions of euros more into a European Union bailout fund for debt-stricken countries, known as the European Financial Stability Facility, it is not so clear that parliaments in the 17 countries in the euro zone will approve an expansion.

It is also possible that a German constitutional court could throw the euro into chaos when it issues a ruling Wednesday on Germany’s participation in the rescue mechanism for fiscally troubled euro members. Analysts say the judges are likely to impose restrictions on the German government that could make decision making in the zone even more cumbersome than it already is.

It would be surprise if the panel of judges banned Germany from taking part altogether, a drastic step that would deprive the rescue fund of its biggest contributor and undermine the integrity of the euro. But the court could well require a vote by the German Parliament every time the bailout fund makes a big move.

Members of the advisory group that gathered Monday in Brussels, including Mr. Schröder, expressed strong support for euro bonds. Despite a fierce debate in Germany, Mr. Schröder said the German public could accept them — as long as there were strict controls placed on how and when they were issued.

Even if euro bonds win wider backing, there are other issues that threaten to upend plans for a tighter monetary union to support the euro. Finland has cast doubt on pledges of European unity by insisting that it receive collateral from Greece in return for aid, another issue that threatens to upset plans to expand the bailout fund. Finland’s prime minister, Jyrid Katainen, pledged Monday to resolve the issue quickly.

Europe’s leaders are acting like firefighters, Felipe González, a former Spanish prime minister, said at the briefing held in Brussels. "They try to deal with the current fire but not prevent the next."

As leaders in Europe try to contain a deepening financial crisis, they are also increasingly talking about making fundamental changes to the way their 17-nation economic union works.

The idea is to create a central financial authority — with powers in areas like taxation, bond issuance and budget approval — that could eventually turn the euro zone into something resembling a United States of Europe.

Officials have been hesitant to publicly endorse such a drastic change. But privately they say the issue has gained urgency in recent months, as it has become clear that Europe’s current approach, which requires unanimity on any significant moves, is unwieldy and inefficient. The idea is being promoted by some global financial officials, who worry about the risks that continued uncertainty in Europe poses to the global economy.

Recently, for instance, when an official from a European central bank met with a financial official in Washington, his host brandished the Articles of Confederation, the 1781 precursor to the United States Constitution, to use as an example of why stronger unions become necessary.

The story of America’s failed early effort to operate as a loose confederation of 13 states is looking increasingly relevant for many European officials. The lack of strong central coordination of the euro zone’s debt and spending policies is a crucial reason Europe has been unable to resolve its financial crisis despite more than 18 months of effort.

The lack of progress has contributed to steep declines in European stocks recently, sending tremors through markets in the United States as well. On Monday alone, several major European markets fell more than 4 percent while markets were also down on Tuesday morning in Australia and Japan. And that is why, despite all the political obstacles, Europe appears to be inching closer to a more centralized approach, and some officials are going public on the issue.

"If today’s policy makers want to successfully stay the course, they will have to press ahead with structural changes and deeper economic integration," António Borges, director of the International Monetary Fund’s European unit, said in a recent speech. "To put the crisis behind us, we need more Europe, not less. And we need it now."

Nothing happens quickly in Europe, however. For the most part, such efforts are still being made behind the scenes. But several longtime financial and central bank officials and staff members said there had been a substantial step-up in planning for a closer European fiscal relationship to match the unified monetary union under which the euro zone has operated for more than a decade.

For now, officials are mainly talking in generalities. "The crisis has clearly revealed the need for strong economic governance in a zone with a single currency," Jean-Claude Trichet, the departing president of the European Central Bank, said in a speech Monday, repeating earlier calls for greater fiscal discipline.

Officials, who spoke anonymously because their discussions were politically charged, said a major overhaul of the way Europe conducts fiscal policy was likely to take a long time and require changes in the treaties governing the euro. But they pointed to the smaller changes that were already taking place as evidence that euro area financial ministries see that they have little choice but to move together if they want to avoid a catastrophic breakdown.

With the new bailout for Greece that was agreed upon by European leaders in July still awaiting approval from each country in the euro zone, the fractionalized way that Europe runs fiscal decision-making risks setting off yet another crisis at each step along the way. Every plan requires agreement among finance ministers and the Parliament of any member country can veto the deal.

Many economists say that the Continent’s debt crisis, which began in early 2010 with the threat that Greece might have to default on its loans, could have been resolved far more quickly if there were some sort of central financial body, akin to the Treasury Department in the United States.

"If they had the equivalent of the U.S. Treasury, then this treasury could have formulated proposals with the collective objective in mind, rather than 17 national objectives competing with each other," said Garry J. Schinasi, a former official with the International Monetary Fund who now privately advises European central banks and governments. "Instead, they fumbled around and took two baby steps forward and three backward."

The idea of a European Treasury that would enforce fiscal discipline on wayward countries, while also having the power to spread European Union wealth from healthier countries to ones struggling to pay their debts, is fiercely unpopular among voters in many countries. Those in prosperous nations like Germany do not want to see their taxes used to bail out countries that borrowed their way into trouble. And those in weaker nations are reluctant to allow outsiders to dictate how their governments spend their money and tax their citizens.

Europe’s currency union has its roots in the agreement signed in 1992 known as the Maastricht Treaty, which set in motion the rules for creating the euro and for joining the euro zone. A later agreement established the European Central Bank, which manages interest rates much like the United States Federal Reserve. But the Maastricht Treaty stopped short of telling countries how to handle spending or taxation, leaving them loose rules on budget deficits to follow — or break, as many did, including Germany and France in the early days of the euro.

In the United States, of course, agreements between Congress and the White House on budget measures can be extremely difficult to reach. But the European process is even more arduous. The problems were highlighted Friday when talks between the Europeans, the I.M.F. and Greece were put off because Athens was coming up short in its plans for meeting budget targets. Stock markets promptly fell on the news.

This week, more challenges await. The top court in Germany is scheduled to rule Wednesday on whether it is legal for that country’s leaders to make such an agreement. While it is expected to allow Germany to participate in the bailout, the constitutional court could surprise the experts. On Thursday, officials in Finland are supposed to make a statement outlining their conditions for approving the deal, which will probably set the pattern for other countries seeking guarantees from Greece that their loans will be paid back.

The heavy lifting involved in approving the new deal for Greece illustrates how difficult it would be to create a European Treasury. But that has not stopped some officials from calling for moves in that direction. Last month, Angela Merkel, the German chancellor, and Nicolas Sarkozy, the French president, proposed new financial transaction taxes for the euro zone, as well as standards for corporate tax laws, so no country could lure businesses at the expense of others with exceptionally low tax rates. They also proposed that each country enshrine in its constitution rules that would limit deficits, a process that is now under way in Spain, Portugal and elsewhere.

Last Thursday, Wolfgang Schäuble, the German finance minister, told the newspaper Bild that he would like to see the European Union’s treaty revised — an arduous process — to enable the union to make common fiscal policies.

An official in the German Finance Ministry, who was not authorized to speak on the matter publicly, said the ministry was trying to avoid terms like fiscal union because it would alienate voters. But he acknowledged that it saw such a union as both necessary and inevitable. "You could call it a fiscal union, but the minister won’t do that," the official said. "What we are talking about is pooling our fiscal policy and doing to fiscal policy what we’ve done with monetary policy."

The euro zone is also moving to increase oversight of countries’ budget plans earlier in the process and to give the European Commission greater power to propose financial penalties on countries that violate the rules, unless blocked by a large majority of members. If and when that happens, said Graham Bishop, an independent financial analyst who has advised the British and European Parliaments, it "would be the moment of collective control of an errant state — the final step toward a de facto political union."

German Chancellor Angela Merkel is fighting to quell a rebellion within her ruling coalition that could potentially destabilize her government, after 25 lawmakers from her center-right camp indicated they might not support legislation to strengthen Europe's bailout fund. Mock votes among lawmakers in Ms. Merkel's coalition late Monday showed she will have to fight to keep her governing majority together in a crucial ballot on Sept. 29, when Germany's parliament will vote on proposals to make the main euro-zone bailout fund bigger and more flexible.

The measures in question are a key plank of a deal struck July 21 by European leaders to restore investor confidence in euro-zone government debt. But a larger-than-expected number of backbenchers from Ms. Merkel's Christian Democrats, as well as from her junior coalition partners the Free Democrats, refused to support the measures in Monday's mock votes. The lack of support is a public signal of dissent within the ranks of the party.

Germany's parliament is widely expected to pass the measures despite the unrest in government ranks, because opposition parties have said they will back the legislation. But reliance on opposition votes would be a severe embarrassment for the chancellor, raising questions about the survival of her government. The unrest within the coalition reflects many lawmakers' belief that ever-expanding bailouts of poorer euro nations pose a growing risk to German taxpayers.

The chancellor is expected to lobby her backbenchers hard to support the legislation. Some of the lawmakers who abstained or objected in the mock votes may bend to pressure and support the government on Sept. 29, analysts say. Failure to pass the euro-zone measures with her own coalition's votes in parliament could trigger a political crisis in Germany, since it would show that Ms. Merkel doesn't have an effective ruling majority on the biggest issue currently facing the country and Europe.

The chancellor's ability to enact other euro-zone overhauls—such as the greater coordination of euro members' fiscal policies and debt management that most economists now say is needed to shore up Europe's common currency—would also be in doubt. Germany's ruling center-right coalition has 19 more votes than it needs to maintain a majority of 311 votes in parliament. In the mock votes, 14 lawmakers opposed the measures to beef up the euro-zone bailout fund, while 11 others abstained.

The legislation in question would increase the lending capacity of the main euro-zone bailout fund, the European Financial Stability Facility, to €440 billion ($620 billion) from €250 billion, while also allowing the fund to lend more flexibly to governments and to buy sovereign bonds in the secondary market.

The European Central Bank is pushing national governments to implement these changes as soon as possible. The ECB has reluctantly propped up the prices of Italian and Spanish government bonds through secondary-market purchases since early August, but wants the government-backed bailout fund to take over such activities in order to protect the central bank's independence.

Ms. Merkel's challenge in maintaining support for her euro-zone policies within her coalition is being hampered by events in Greece, where the government is struggling to achieve the reduction of its budget deficit that was supposed to be the quid pro quo for receiving emergency loans from Germany and the rest of the euro zone.

German Finance Minister Wolfgang Schäuble reminded Greece on Tuesday that each quarterly disbursement of international loans depends on Greece making progress on its deficit. In a speech to Germany's parliament, Mr. Schäuble reiterated that Athens can't get its next tranche of aid unless it satisfies the team of international inspectors from the European Union, ECB and International Monetary Fund that is monitoring Greece's progress.

Greece's government, responding to the rebukes from Germany and elsewhere in Europe, vowed Tuesday to increase the pace of its economic overhauls. Finance Minister Evangelos Venizelos told reporters the government would step up efforts to shrink the public sector, privatize state industries and liberalize the economy. His remarks followed a Greek cabinet meeting that was called to discuss the country's faltering reform drive.

The outcome of Ms. Merkel's struggle in parliament partly depends on a ruling, expected Wednesday, by Germany's constitutional court, which has been considering lawsuits against German participation in the European bailout programs for Greece, Ireland and Portugal. If the court rules that those bailout decisions were legally sound, it could help Ms. Merkel disarm some of the criticism within her coalition, analysts say.

If court demands a bigger say for Germany's parliament in future bailout decisions, as many analysts expect, that too could help Ms. Merkel reassure her lawmakers—though it could make it harder for Europe to make fast decisions if the debt crisis escalates.

Italy's government, like Greece's, is frustrating European authorities with its sputtering reform ambitions. Rome on Tuesday said it will again revamp its efforts to close its budget deficit, even as tens of thousands of Italians took to the streets to protest the austerity drive.

Friday's disappointing jobs figures heightened investor expectations the Federal Reserve will embrace more extraordinary easing at its late-September meeting. Monday's European stock plunge will only fuel such thinking. One likely course of action: The Fed will shift, or "twist," its $1.65 trillion portfolio of Treasury securities to hold more long-dated government debt.

Market reaction would depend on the type of "twist." In one scenario, yields on short-dated government debt could rise, for example, while those on the 10-year note could fall further as the Fed boosts purchases in this area.

Detail aside, what impact would such a move have on the economy? Probably not much. In some ways, the "twist" is similar to the Fed's so-called quantitative-easing programs in which it bought Treasurys, Michael Cloherty, head of U.S. rates strategy at RBC Capital Markets, noted in a report Friday. The advantage, he added, is "the QE brand name is fairly tarnished now, so there is some good done by having a different label on a similar policy."

Another benefit should be lower mortgage rates. Yet, again, they are already at historic lows, while home prices are down and housing supply plentiful. With buyers hesitant, even lower rates may well not reflate housing markets.

Finally, some might hope a twist would boost confidence by sparking a stock rally like that from the last $600 billion bond-buying program. Yet "twisting" wouldn't expand the Fed balance sheet. And it may give the impression the Fed is clutching at straws, especially given skepticism on the effectiveness of the last QE program in boosting the economy.

Meanwhile, there are potential downsides. The Fed would be extending its manipulation of markets explicitly to the long end of the yield curve. This means investors will lose even more clarity on the yield curve as a way of signaling or seeing views on long-term inflation and growth. The Fed would also stoke fears it is monetizing government debt longer-term. That could increase political pressure on the Fed, further weaken the dollar and send gold to new heights.

And those are apparent risks. "The Fed might think it knows what the results will be, but surprises have hidden in every extraordinary move the Fed has made the last three years," Jim Vogel of FTN Financial points out. Unfortunately, hidden surprises aren't likely to include plunging unemployment or surging economic growth. As the Fed itself has acknowledged, its ability to cure the economy is growing more and more limited.

Workers across Italy began a strike on Tuesday as the center-right government of Prime Minister Silvio Berlusconi scrambled to secure parliamentary backing for a package of austerity measures.

The eight-hour strike called by the CGIL, Italy's largest union, is expected to disrupt public transport including air traffic, underlining a sense of emergency in the euro zone's third largest economy. The strike, called to protest the 45.5 billion euro ($64 billion) austerity measures, coincides with the opening of a debate in the Senate which the government hopes will see swift approval before the package moves to the lower house.

In an unusual statement that highlighted the gravity of the situation after a sell off of Italian bonds on Monday, President Giorgio Napolitano said urgent action was needed to restore trust in public finances. "It is a sign of the persistent difficulty in regaining trust as is urgently and indispensably required," he said, adding that he urged all parties not to block measures needed to restore credibility. He said there was time to insert measures "capable of reinforcing the efficiency and credibility" of the austerity package passed in parliament last month. It is currently undergoing revision.

Business daily Il Sole 24 Ore said an increase in VAT, a measure so far resisted by Economy Minister Giulio Tremonti, may be included in the package as well as a possible delay to retirement ages. Tuesday's debate in the Senate is due to start at 4.30 p.m. (10:30 a.m. ET) with upper house approval possible as early as Wednesday after the center-left opposition Democratic Party said late on Monday it was willing to allow a swift vote. The package would then move to the lower house before final approval, originally expected by September 20.

The European Central Bank has been shielding Rome from the full force of the market by purchasing Italian bonds to try to hold down yields and stop borrowing costs from reaching unsustainable levels. But its patience has been stretched by the chaotic manner in which the austerity package has been handled and by the absence of concrete steps to meet the government's pledge of balancing the budget by 2013.

On Monday, Mario Draghi, who takes over as head of the ECB in November, stepped up calls for Italy to act, delivering a pointed warning that the central bank's willingness to continue buying bonds "should not be taken for granted."

Yields ClimbIn a clear sign of rising market worries, yields on Italian 10-year bonds climbed to nearly 5.6 percent on Monday, approaching the levels of more than 6 percent seen before the ECB began buying bonds last month.

The premium investors demand to buy Italian bonds rather than benchmark German debt widened to 369 basis points, more than 30 points higher than the equivalent Spanish spread as Italy has moved firmly to the center of the euro zone crisis. "Italy is today the weak point of the euro. Its weakness risks irreparably the whole European construction, multiplying the damage for us as well," Turin daily La Stampa said in a front-page editorial.

Italy's European partners have been watching with alarm as government wrangling has overshadowed the package. German Chancellor Angela Merkel told members of her party on Monday that the situation in Italy was "extremely fragile." Italy has wrestled with sluggish growth and one of the world's highest levels of public debt for years but a modest deficit, high private savings and a conservative banking system had kept it largely on the margins of the crisis until July.

Berlusconi's government, which until recently boasted repeatedly of keeping Italy out of the crisis, has struggled to build a defense against the market pressure, hampered by deep divisions in its own ranks over tax and pension issues. Measures ranging from a tax on high earners, retirement delays for some university graduates, cuts to local government funding or the abolition of small town councils have been proposed and then dropped with bewildering speed.

In their place, Tremonti is putting his faith in stepped up measures to combat tax evasion despite a long history of failure by successive Italian governments. Berlusconi and Tremonti have appeared increasingly at odds over the package, heightening speculation of a possible political crisis which could bring down the government.

Further complicating the picture, Berlusconi has also been hit by a new legal case, following the arrest of a businessman last week on charges of attempted extortion of the premier in connection with a two-year-old prostitution scandal.

Europe is engaged in a high-stakes game of brinkmanship that poses grave risks to the global economy. At last weekend's Villa d'Este Forum in Italy, European policy makers didn't hide their fury at Greece's back-sliding over promised structural reforms and spending cuts. At the same time, Italian ministers undermined the remaining credibility of Silvio Berlusconi's government with a series of complacent speeches. Given such a dangerous breakdown in trust within Europe, investors are right to fear the worst.

Germany and its Northern European allies believe only intense market pressure can force weak economies to cut spending and improve competitiveness. But Greece has learned that whenever the crisis in Europe's periphery threatens to overwhelm the core, Europe will ignore previous broken promises and step up with a fresh bailout.

Italy now appears to be making the same calculation. The government insists it will fulfill its commitment to balance the budget by 2013, but ministers show no appreciation of the urgent need for structural reforms to address the chronic weakness of an economy that grew on average 0.3% between 2001 and 2010 and experienced a 25% increase in unit labor costs relative to Germany over the same period. Instead, they talk incessantly of euro-zone bonds as a solution to misfortunes they blame largely on external forces.

But Italy's dream of euro-zone bonds is likely to remain a fantasy until trust between member states is restored. This no longer depends simply on implementing austerity budgets. Structural reforms have now taken center stage because they are a test of whether the euro zone is worth saving at all: If countries refuse to improve competitiveness, then any attempted solutions to the immediate sovereign-debt crisis will prove short-lived.

So what can be done about Greece and Italy? Athens rejects accusations it is dragging its feet but has promised to use a 10-day hiatus in talks with the European Central Bank and International Monetary Fund over progress toward its bailout targets to speed up reforms. If it fails to deliver again, European policy makers now talk darkly of a total loss of fiscal sovereignty. How this might work in practice isn't clear.

As for Italy, some now believe its best hope lies with the ECB, which last month threw Rome a life line by agreeing to buy its bonds. If the ECB were to stop buying bonds, the subsequent rise in yields might bring down Mr. Berlusconi's administration, paving the way for President Giorgio Napolitano to appoint a technical government with the constitutional authority to make tough decisions. Then, at least, the long process of rebuilding the credibility of the euro zone's third-biggest economy could begin in earnest.

As Europe struggles to contain its government debt crisis, the greatest fear is that one of the Continent’s major banks may fail, setting off a financial panic like the one sparked by Lehman’s bankruptcy in September 2008.

European policy makers, determined to avoid such a catastrophe, are prepared to use hundreds of billions of euros of bailout money to prevent any major bank from failing.But questions continue to mount about the ability of Europe’s banks to ride out the crisis, as some are having a harder time securing loans needed for daily operations.

American financial institutions, seeking to inoculate themselves from the growing risks, are increasingly wary of making new short-term loans in some cases and are pulling back from doing business with their European counterparts — moves that could exacerbate the funding problems of European banks.

Similar withdrawals, on a much larger scale, forced Lehman into bankruptcy, as banks, hedge funds and others took steps to shield their own interests even though it helped set in motion the broader market crisis. Turmoil in Europe could quickly spread across the Atlantic because of the intertwined nature of the global financial system. In addition, it could further damage the already struggling economies elsewhere.

"This crisis has the potential to be a lot worse than Lehman Brothers," said George Soros, the hedge fund investor, citing the lack of an authoritative pan-European body to handle a banking crisis of this severity. "That is why the problem is so serious. You need a crisis to create the political will for Europe to create such an authority, but there is still no understanding as to what the authority will do."

The growing nervousness was reflected in financial markets Tuesday, with stocks in the United States and Europe falling 1 percent and European bank stocks falling 5 percent or more after steep drops in recent weeks. European bank shares are now at their lowest point since March 2009, when the global banking system was still shaky following Lehman’s collapse.

Investors also continued to seek the safety of United States Treasury bonds, as yields on 10-year bonds briefly touched 1.90 percent, the lowest ever, before closing at 1.98 percent.Adding to the anxiety, several immediate challenges face European officials as they try to calm markets worried about the debt crisis spreading.

In the coming weeks, the 17 countries of the euro currency zone each could agree to a July deal brokered to bail out Greece again and possibly the region’s ailing banks. Along with getting unanimity, more immediate obstacles could trip up the agreement.

On Wednesday, Germany’s top court upheld the legality of Berlin’s rescue packages, but said any future bailouts for debt-stricken euro zone countries must be approved by a parliamentary panel. On Thursday, officials in Finland are to express their conditions for approving the deal, and other countries may follow with their own demands to ensure their loans will be paid back.

Though they have not succeeded in calming the markets, European leaders have taken a series of steps to avert a Lehman-like failure. New credit lines have been opened by the European Central Bank for institutions that need funds, while the proposed Greek bailout would provide loans to countries that need to recapitalize their banks. In addition, the central bank has been buying up bonds from Italy and Spain, among other countries, to keep interest rates from spiking. Many of these have been bought from European banks, effectively allowing them to shed troubled assets for cash.

While the problems in smaller countries like Greece and Ireland are not new, in recent weeks the concerns have spread to banking giants in countries like Germany and France that are crucial to the functioning of the global financial system and are closely linked with their American counterparts. What is more, worries have surfaced about the outlook for Italy, whose debt dwarfs that of other smaller troubled borrowers like Greece.

"It seems like the banking sector globally is being hurt on multiple fronts," said Philip Finch, a bank strategist with UBS in London. "It’s definitely getting worse."

In Europe, the worry is that government bonds owned by European banks could fall sharply in value if economically distressed countries cannot pay back their loans. That would saddle the most exposed banks with huge losses. As a result, banks are reluctant to lend money to one another and are hoarding cash. "If sentiment continues to deteriorate, ultimately we’ll see a deposit run," Mr. Finch said. "I’m extremely worried about that."

Mr. Finch said European banks needed to raise at least 150 billion euros in new capital, even if they do not experience large losses on sovereign debt. With stock prices so low, though, that is difficult to do, and any new offerings of company stock would dilute the value of existing shares. American money market funds, long a reliable financing source for capital starved European banks, have sharply cut back on their exposure — starting in Spain and Italy but now also France — making it harder for European banks to loan dollars.

The 10 biggest money market funds in the United States cut their exposure to European banks by a further 9 percent in July, or $30 billion, after a reduction of 20 percent in June, the Institute of International Finance said in a report issued Monday.

"U.S. investors remain very sensitive to the headlines out of Europe," said Alex Roever, who tracks short-term credit markets for JPMorgan Chase. "The sell-off that we’ve seen in European bank stocks is going to reinforce that and investors are likely to stay hyper-cautious. European banks are not borrowing as much, and they’re not borrowing for as long as they could three months ago."

Nevertheless, American institutions remain vulnerable to problems their French counterparts might encounter. At the end of the second quarter, JPMorgan Chase reported total cross-border exposure of $49 billion to France, while Citigroup had $44 billion and Bank of America had $20 billion.

French banks, which have huge holdings of sovereign debt from countries across Europe, have been among the hardest hit, despite the French government’s efforts to protect them. The authorities imposed a temporary ban on short-selling last month after shares in Société Générale, a bank considered too big to fail, tumbled on rumors it may be insolvent.

But shares of Société Générale are still sliding amid concern that it, like BNP Paribas and other major French banks, is having trouble raising dollars to finance its American and other dollar-based operations. Société Générale officials say that the market’s fears are unfounded. The bank’s chief executive, Frédéric Oudéa, has described rumors that Société Générale was having trouble raising money as "fantasy." The shares closed down 6 percent Tuesday at 18.93 euros. Three months ago the shares were at 40. What is more, French banks, like other European banks, are able to obtain financing from the European Central Bank if necessary.

Meanwhile, problems in Spain were highlighted on Tuesday when one of Spain’s largest savings banks, Caja de Ahorros del Mediterráneo, reported a startling increase in bad loans to 19 percent of overall lending from 9 percent at the end of last year. Still, the huge stockpile of euros that banks have stashed away at the European Central Bank at rock-bottom interest rates — last night it hit a recent high of 166 billion euros — suggests that no bank is close to a Lehman-like failure.

The risk now is that Europe’s resistance to recapitalizing its banks could turn into a broader crisis. Daniel Gros, director of the Center for European Policy Studies in Brussels, had a blunt explanation of why European governments have so far refused to recapitalize their banks. "They don’t have the money and they are in the pockets of their bankers," Mr. Gros said. Policy makers in the United States and Britain, where compulsory infusions of new capital played a crucial role in calming the markets in 2008, have long urged Europe to do the same.

The Swiss National Bank stunned financial markets on Tuesday by setting a ceiling for the Swiss franc against the euro in an attempt to prevent the strength of its currency from pushing its economy into recession.

The central bank said it would set a minimum exchange rate of SFr1.20 against the euro. The SNB action came after previous measures to weaken its currency proved ineffective as the worsening eurozone crisis prompted a flight to safety by investors, boosting haven demand for the franc and sending it up to record levels.

Analysts said the move raised the stakes in the global currency war as countries vie to protect their exporters and, by removing a release valve for investors looking for a haven from current market turmoil, could heighten instability on financial markets. "The start of full-on currency wars has started in earnest," said Maurice Pomery, chief executive at Strategic Alpha. "After currency wars come trade wars and as we see the exporting world pressured as the developed world contracts, tensions will rise."

The surprise move prompted the franc to fall 8.2 per cent against the euro to SFr1.2015 in a matter of minutes and to lose 8.8 per cent against the dollar to SFr0.8563. Switzerland’s stock market surged, with Zurich’s SMI gaining 4 per cent.

The SNB said the current massive overvaluation of the Swiss franc posed an acute threat to the Swiss economy and carried the risk of pushing it into deflation."The Swiss National Bank is therefore aiming for a substantial and sustained weakening of the Swiss franc," the central bank said in a statement.

"With immediate effect, it will no longer tolerate an exchange rate in the euro against the Swiss franc below the minimum rate of SFr1.20. The SNB will enforce this minimum rate with the utmost determination and is prepared to buy foreign currency in unlimited quantities." The SNB added that: "even at a rate of SFr1.20 per euro, the Swiss franc is still high and should continue to weaken over time. If the economic outlook and deflationary risks so require, the SNB will take further measures."

The move was a significant departure for the central bank, which in recent weeks has been attempting to rein in the franc by flooding the money market with liquidity and using FX swaps to drive interest rates lower.

The commitment could expose the SNB to further massive losses. The central bank, which is in part privately owned, lost almost SFr20bn last year after fruitless interventions in the foreign exchange markets in 2010 left it holding massive quantities of euros and dollars, whose value steadily declined in Swiss franc terms.

Although the SNB abandoned its intervention strategy in July 2010, the bank suffered further losses of about SFr10bn in the first half of this year as its foreign currency holdings further declined in value against the surging franc. Many predicted that the market would test the central bank’s resolve, given that a major source of the strength of the franc – concerns over eurozone government debt – were beyond its control.

Lena Komileva, a strategist at Brown Brothers Harriman, said the move marked a shift in the SNB’s strategy to weaken the franc from a covert psychological war with the market to open arm-wrestling.

"Since the euro remains in a vortex of deteriorating structural, cyclical and financial systemic risks, the incentives for the market are now aligned one-way to sell the euro at the overvalued level set by the SNB," she said. "This will leave the SNB intervening in the market on a continuous daily basis to protect the peg, with volatile and disorderly euro capital markets only diminishing the SNB’s psychological threat."

Guido Mantega, Brazil’s finance minister who warned on currency wars last year, described the setting of a peg by the Swiss central bank as an act of "desperation". Brazil has launched numerous currency and capital controls to try to limit the real’s appreciation. "We don’t need to [set a peg]. It’s always better to work with a floating exchange rate," he said.

Analysts said the SNB’s intervention could prompt retaliatory action from other central banks, potentially prompting Tokyo to launch a fresh attempt to weaken the yen, which like the franc has been driven to record levels as investors have sought a haven from market turmoil. "The announcement now raises the potential risk that other central banks will also make surprise announcements to deal with this new round of risk aversion," said Divyang Shah, analyst at IFR Markets.

Separately, one of Switzerland’s leading economic forecasters warned on Tuesday the economy was on the brink of a recession because of the strong currency and weakening world economy. BAK Basel cut its forecast for Swiss economic growth next year to just 0.8 per cent, less than half the 1.9 per cent estimated for this year.

It might only be a number or a psychological barrier for markets. But the 2 per cent level that 10-year US Treasury and German Bund yields have dived under in the past few days is hugely significant.

The only other big western government bond market to go below 2 per cent in recent times was Japan. Since it dropped beneath that level in 1997, it has only risen above 2 per cent for a few weeks in 1999 and an even shorter period in 2006. Otherwise Japanese yields have been marooned at historically low yields for the past 14 years.

That was accompanied by an extraordinary collapse in Japanese stocks with the Nikkei 225 now standing at under a quarter of its peak level of 1989. It is a profoundly sobering thought for western investors who saw Treasuries yesterday hit their lowest yields since 1950 and Bunds their lowest ever while stock markets continued their summer slump. If it persists, it would threaten to change some of the main tenets of asset allocation and investing.

"It is decision time for investors," says Rod Davidson, head of fixed income at Alliance Trust Asset Management in Edinburgh. "If you believe in a Japan-style situation, almost all bets are off. Equities suffer, corporate credit widens and you would want to own long-dated government bonds. But there are question marks over even that as you start to worry about the solvency of governments."

But how likely is it that western bonds and equities do go fully Japanese? Some investors, shareholders in particular, remain relatively cautious of making the suggestion, not least because of its implications. The comparison between bond and equity yields is one of the most frequently used valuation tools and a firm part of many asset allocation decisions. A continued slide in bond yields would turn this on its head.

However, if the past few decades of market history holds true, that leaves a large group of investors to believe that equities look better value currently than bonds. The FTSE indices for the US, UK and eurozone have dividend yields of 2, 3.5 and 4.5 per cent, according to FTSE data. That compares with US, UK and German 10-year government bond yields of 1.95, 2.3 and 1.81 per cent on Tuesday, according to Tradeweb.

"The level of bond yields themselves is not telling you that equities are a value trap," says Mislav Matejka, equity strategist at JPMorgan. He argues that a crucial difference to Japan is that companies are "strong and profitable" in the west unlike the experience in the 1990s in Tokyo.

But others are gloomier, arguing that bond investors have been ahead of stock markets throughout the crisis. "Every time we have seen a divergence between the Treasury and equity markets, bonds have been right and it appears to be the case once more," says Jack Ablin, chief investment officer at Harris Private Bank. "The current level of the S&P 500 is pricing in a decline of 20 per cent for earnings, but if we get a recession, I’m concerned that profits could fall further."

Bond investors are by their nature more pessimistic, often doing well when fears about the economy are at their worst. So it is unsurprising to find many of them buying into the Japan argument. "The US faces a lost decade and we are already three years into this," says David Ader, analyst at CRT Capital. "The US has followed Japan with a housing collapse and a generic deleveraging that leaves us with banks still not willing to lend and businesses not expanding."

He also thinks the US, like the case with Japan, has its own version of political weakness and demographic concerns, led by baby boomers facing retirement. He therefore thinks 10-year yields could go to 1.65-1.75 per cent should US growth stall at 1 per cent.

But not all bond investors believe that the lurch lower can continue for much longer. Mr Davidson points to the fact that most traders have only known declining US yields as they have consistently fallen over the past three decades. "We have been dumbfounded at the levels yields have reached. We don’t really believe the move but it is hard to fight it," he adds.

Bond traders are expecting further policy initiatives from both central banks and governments. In particular, they anticipate the Federal Reserve will undertake further easing, possibly buying more longer-term Treasuries in order to narrow the gap to shorter-dated yields. But, with the 10-year note yield already below 2 per cent, the bond market has largely priced in such a move already.

Instead, some fret that the effectiveness of new stimulus measures is wearing off. "The perspective has changed, the debt stimulus of the past 30 years has met its conclusion, but we are still trying to squeeze the last remnants of toothpaste out of the tube," says Mr Ablin.

The worries about a Japanisation of western markets remain acute. One reality seems inescapable whichever way investors vote. As Mr Matejka says: "It is very reasonable to believe that potential growth in the developed world will be lower than it was in the past 20 years. Therefore the rates of return on most asset classes should be lower."

Silvio Berlusconi’s centre-right government caved in to pressure from bond markets and European partners late on Tuesday by announcing a last-minute U-turn to strengthen Italy’s proposed austerity package.

After more than three weeks of flip-flopping, the prime minister’s office announced that the highest value added tax band would be increased to 21 per cent from 20 per cent; that a 3 per cent wealth tax would be imposed on top earners, and that introduction of a later retirement age for women would be brought forward. The cabinet also plans to meet again on Thursday to discuss proposed changes to the constitution to enforce balanced budgets and simplify multiple tiers of local government.

The amendments bolster a budget bill that had been criticised by both the European Central Bank and the European Commission and dismissed by bond market investors as inadequate. Prevarication in Rome had added to the sense of crisis gripping the eurozone over the sovereign debt levels of a widening circle of member states, with Italy’s debt equal to 120 per cent of gross domestic product considered too vast for an external bailout.

Rather than restoring confidence , the latest changes reinforced the image of a government in disarray. The amendments represented climbdowns for all major figures involved in the messy budget process. Giulio Tremonti, finance minister, had opposed an increase in VAT; Mr Berlusconi had blocked a wealth tax, and Umberto Bossi, leader of the allied Northern League, had resisted pension changes.

Adding to the confusion, Ignazio La Russa, defence minister, told reporters late on Tuesday that the new wealth tax would be applied to incomes over €300,000 euros rather than €500,000 previously communicated. "Of the three new measures, only the VAT hike will have an immediate and sizeable impact on the budget … In order for investors to take a more positive view on Italy, measures to boost economic growth will also be necessary," said Riccardo Barbieri Hermitte, chief European economist at Mizuho International.

Business leaders in Milan agreed the budget could only be the start and that the economy needed greater structural reforms. "The market wants to see substantial cuts in spending. Some increased taxes will not be enough to diminish all concerns," a senior banker said. The changes are likely to fuel further opposition in the streets following an eight-hour national strike staged by the main trade union federation on Tuesday in protest against a budget widely seen as unfairly punishing lower income earners. Opposition parties were quick to condemn the new measures.

Milan’s stock market recouped some of its losses after the news but still closed down nearly two per cent. Italian bond markets, however, reversed an 11-day losing streak, the longest since the launch of the euro, with yields on 10-year bonds falling to 5.48 per cent. Traders estimated that the ECB, seeking to shore up confidence, had bought about €3bn in Italian and Spanish bonds on Tuesday.

The government announced it would curtail debate over the legislation by calling for a vote of confidence in the senate on Wednesday. Final approval from the lower house by the end of the week will test the strength of Mr Berlusconi’s thin majority.

German finance minister Wolfgang Schäuble has vowed to halt rescue payments to Greece unless the country complies totally with the EU-IMF demands, brushing aside warnings that a Greek collapse would set off a disastrous chain reaction and a global banking crisis.

"The next tranche can be paid only when the conditions have been met. There is no room for manouvre here," he told the Bundestag. Yields on 10-year Greek debt spiked to a fresh record of 19.8pc on fears of a disorderly default.

The tough words reflect sentiment in Berlin that Greece should be left to its fate or even be ejected from the monetary union, even though the chief reason Greece has failed to meet its deficit target is the crushing effect of recession. The economy will have shrunk by 12pc by the end of this year, playing havoc with debt dynamics.

Mr Schäuble rebuffed calls from the International Monetary Fund for a softening of Europe’s austerity drive. "Piling on more debt now will stunt rather than stimulate growth in the long run. Highly indebted Western democracies need to cut expenditures, increase revenues and remove structural hindrances in their economies, however politically painful," he wrote.

German insistence on deflation polices is causing near universal despair. Spain’s leader Jose Luis Zapatero - who told union leaders at a closed-door gathering that the economy was "sliding into the abyss" - called for global action "through the G7 or the G20" to shore up Europe’s financial system.

Berkeley professor Barry Eichengreen said Europe’s rescue fund (EFSF) is too small to save the eurozone, leaving the creditor powers of Asia as the last hope. "Europe’s leaders have shown themselves incapable of breaking the vicious cycle, raising the danger of the European crisis becoming a global crisis. It is now past due time for the IMF and G20 to intervene," he said.

"Asia’s own stability hinges on the stability of the world economy," he said, callling for a variant of the "Brady bond" plan used in Latin America. Charles Dumas from Lombard Street Research said German policies - enforced by EU bodies - will doom the eurozone to a slump. "Here is the stubborn folly of the sound-money men of the 1930s," he said.

"Pursuit of debt reduction by deflation only - in a world whose savings rate is already at an all-time high - means Euroland recession next year could well be prolonged and deepened into depression. At the root of this are fallacious and malignant policies," he said.

Mr Dumas said Germany is not only pursuing a "predatory trade policy" within EMU through a misaligned currency but is also blindly forcing a downward slide for the whole system by compelling the deficit states to choke demand without offsetting stimulus in Germany and creditor states. German factory orders fell 2.8pc in July and confidence indicators have plunged, suggesting that Germany itself may be near recession. Car parts giant Bosch said the economy was in an "extremely critical condition".

Political pain was in evidence in cities across Italy on Tuesday as protesters scuffled with police and trade unions launched a general strike to protest austerity. Italy’s cabinet agreed to further measures to stave off a spiralling debt crisis, accepting a rise in value added tax from 20pc to 21pc, a higher retirement age for women after 2014, and a 3pc wealth tax on those earning more than €500,000, on top of swingeing cuts to the regions.

Premier Silvio Berlusconi appeared to backslide last week. He was forced to submit after Italy’s 10-year yields surged to 5.57pc and spreads over Bunds hit fresh highs. Yields had dropped earlier to 5pc after the European Central Bank launched mass bond purchases. However, the ECB is switching intervention on and off to pressure the government. Mario Draghi, the Bank of Italy’s governor and the ECB’s next chief, said Rome should not "count on" intervention.

Separately, Slovakia said its parliament would not ratify the July deal to boost the EFSF rescue fund before December, meaning that it will not be operational before February. It is unclear whether the ECB can step in to hold the line in Italy and Spain for that long. An internal vote on the EFSF package by parties in Chancellor Angela Merkel’s coalition in Germany showed that 25 of her Bundestag deputies will vote against the measure or abstain, risking the downfall of the government.

Germany’s consitutional court is expected to demand further powers for the Bundestag when it rules on the legality of Europe’s bail-out machinery on Wednesday. There is an outside "tail risk" that it will go further, restricting Germany’s ability to participate in rescues until there is a fresh EU Treaty. That would be an earthquake.

BNP Paribas SA, France’s largest bank, said it has "an excess of short-term liquidity" in U.S. dollars and that the company has to deposit the extra funds at the U.S. Federal Reserve. "It is an additional clue of how much jammed the interbank market is," said Christophe Nijdam, a Paris-based analyst at AlphaValue. "There is no obligation to deposit excess U.S. dollar funds at the Fed as far as I know. It could be deposited with other banks."

BNP Paribas has "a sizeable liquidity buffer," the Paris- based bank said in a note to clients and investors dated Sept. 6 and obtained by Bloomberg. The lender joins Societe Generale SA and Credit Agricole SA, France’s second- and third-biggest banks, respectively, in providing details on financing from U.S. money-market funds. Societe Generale has fallen 52 percent this year in Paris trading amid funding concerns and the European sovereign-debt crisis. BNP Paribas has declined 36 percent in the period.

In August, BNP "experienced a shortening in maturities available and some decrease in the amounts coming from U.S. money-market funds," the bank said. The company gets U.S. dollar short-term funding from sources including corporates, central banks and wealth-management clients with financing in the currency spread across the U.S., Gulf countries, Asia- Pacific and Western Europe, it said, without giving any figure for U.S. dollar funding needs.

Passing On Costs"Alternative U.S. dollar funding sources are of course more expensive and we have to pass that additional cost on to our U.S. dollar borrowing clients," BNP Paribas said. "In practice, some of them may not accept and U.S. dollar funding needs may come down." "This shows a bias in favor of trading activities rather than financing the real economy," said AlphaValue’s Nijdam. For a bank, "it’s much easier and faster to decrease the trading book rather than the loan book," he said.

The reduction in the willingness of banks to lend to each other is mostly an anticipation of new Basel rules and "not mainly due to counterparty risk issues," the French lender said. The interbank market situation today "is very different" compared with the crisis that followed Lehman Brothers Holdings Inc.’s 2008 collapse, the company said. BNP Paribas reiterated that it has about 150 billion euros ($211 billion) of assets eligible to central banks, including $30 billion eligible to the Fed, according to the note. The lender also repeated it completed its 2011 medium- and long-term funding program of 35 billion euros.

The euro region has a "core of wealthy and sound countries," BNP Paribas said. The bank doesn’t see a "specific risk" that France’s sovereign debt might be downgraded after Standard & Poor’s last month lowered the U.S.’s credit rating to AA+ from AAA on Aug. 5. BNP Paribas should "gradually" comply with capital requirements for systemically important financial institutions with no need of any capital injection, it said.

Unlike previous generations, some baby boomers believe they've already given their children enough, and they plan to spend the money they've saved on themselves.

Carol Willison has made lots of financial sacrifices for her two children over the years, including paying most of her older daughter's medical school tuition. But Willison's generosity has reached its limits. Not only doesn't the 60-year-old Seattle woman plan to leave her daughters an inheritance when she dies, she's trying to spend every last dime on herself before she goes. "My goal is when they carry me away in that box that my bank account is going to say zero," Willison said. "I'm going to spoil myself now."

Upending the conventional notion of parents carefully tending their financial estates to be passed down at the reading of their wills, many baby boomers say they instead plan to spend the money on themselves while they're alive. In a survey of millionaire boomers by investment firm U.S. Trust, only 49% said it was important to leave money to their children when they die. The low rate was a big surprise for a company that for decades has advised wealthy people how to leave money to their heirs. "We were like 'wow,'" said Keith Banks, U.S. Trust president.

Whether to leave an inheritance is a decision increasingly faced by many of the nation's 77 million baby boomers, and it's becoming all the more complicated by the troubled economy. Boomers are caught between the desire to enjoy their long-awaited golden years and the pressure of various financial concerns, such as fear of outliving their savings and the need to help parents, children or siblings who have their own money struggles.

Many boomers, who range in age from roughly 47 to 65, simply believe that after years of hard work they can spend their money as they choose, experts say. They spent their lives building businesses and careers, often at the expense of their health or personal relationships. And after years of footing the bill for their kids' pricey educations, they see no reason to curb their spending impulses in their later years.

Besides, they figure, their kids will get something since nobody can synchronize their demise precisely to the emptying of their bank accounts. "I do not see my baby boomer clients giving up a vacation or wine or dinners out so that they can leave more money to their children, because they feel like they've already done it for their kids," said Susan Colpitts, executive vice president of a wealth management firm in Norfolk, Va. "They say, 'If there's something at the end I'd love [the kids] to have it, but what's important for me now is to get what I've earned, which is to travel and have a nice bottle of wine,'" Colpitts said.

Many boomers already are giving the equivalent of an inheritance, except they're doling out the cash while they're still alive, said Ken Dychtwald, chief executive of research firm Age Wave. They're supporting elderly parents, adult children or other family members who are suffering professional or financial woes. "How can you say no when a child asks ask for a down payment for a house or money to remodel their house to have a bedroom for a second child?" Dychtwald said. "A lot of boomers are finding that family members are taking cash advances on those inheritances right now."

Wealthy boomers are holding back on inheritances for other reasons. Some worry that their kids will squander inheritance money or develop a sense of entitlement. One-quarter of boomers worry that their children will become lazy and 1 in 5 fear that the kids will squander the money, according to the U.S. Trust survey. More than half the respondents haven't told their children how much they're worth.

Even people who are leaving an inheritance agonize over those risks. Norma Goldberger and her husband plan to leave money to their three grown children with proceeds from the sale of a successful medical business. But the Ohio couple have struggled with sending the right message and have revised their will three times, she said. "From being self-made I want them to feel [the money] is precious," Goldberger said. "If they get a whole lump at once maybe they wouldn't, and they might blow it all. Not that they're capricious people, but money can corrupt."

Others have held off on inheritances because they're scared of running out of money in a shaky economy. Even the well-to-do have turned cautious, especially out of fear of spiraling medical costs. The concerns are legitimate, financial advisors say, because boomers have longer life expectancies than their parents but fewer safety nets such as pensions to guarantee financial security.

As for Willison, she believes that a lifetime of financial sacrifice for her daughters entitles her to a bit of indulgence. Neither Willison, an office space designer for an energy company, nor her husband, a home appraiser, earned huge salaries, she said. Although they supplemented their salaries with income from rental homes they bought and fixed up, the family lived conservatively, she said.

Their children got scholarship money and held campus jobs during college, but Willison and her husband paid the rest of the tuition to avoid saddling their daughters with student loans. That gave the daughters the financial flexibility to buy houses while still in their 20s. "Not only have they thanked me, both of their husbands have thanked me," Willison said.

Willison's older daughter, Breanne Brown, says her parents deserve to enjoy their savings. "If there's something left, that's great. If not, that's great, too," Brown said. "They worked really hard for everything and they should be able to spend it."

And that's what Willison plans to do as she pursues a lifelong love of travel. She went to Tanzania and Kenya this year. "I'm not going to say, 'Oh gee, I wanted to go to China and I can't because I have to save this money for my kids,'" she said. "I've given them a terrific foundation in life," she said. "I've helped launch them with their education and their careers. If they can't make it on their own now, they can never make it. I've done my job. Now I'm going to enjoy life."

Pension funds in developed economies are facing a new crisis as falling equities and tumbling bond yields widen their deficits, threatening the incomes and retirement dates of future retirees.

At the heart of their problems is a steady move by pension plans in the United States, euro zone, Japan and the UK to cut exposure to risk after the financial crisis. But this "de-risking" may end up depressing their long-term returns from stock market investment and challenge the conventional wisdom that shares generate higher returns than bonds. With weaker holdings and increased liabilities, companies will find it more difficult to fund existing pension schemes. They may cut new business investments as they use more cash to pay pensions.

For future pensioners, it means they will potentially face a lower retirement income and a longer working life -- or both. This year has been a nightmare for many in the industry -- which controls $35 trillion (22 trillion pounds), or a third of global financial assets -- and funding deficits are posting double-digit rises. "We had a credit crisis and government bond crisis, and the third one we have is the pension crisis. This is the one where everything is going wrong and there's no obvious way out," said Kevin Wesbroom, UK head of global risk services at consultancy Aon Hewitt.

The sharp retreat in stocks through the summer has hurt them again by weakening their asset positions and threatening to erode stock market recoveries seen since the equity collapse surrounding the 2007-2009 credit crisis. Even lower bond yields are proving to be a new headache. "The real killer is liabilities are going up because in the flight to quality everyone gets out of equities and runs for cover in safe assets like government bonds, and yields are falling," said Wesbroom.

Many defined benefit pension plans -- where benefits are pre-determined -- pay a fixed stream of income to retirees. The low-yielding environment makes it harder for the funds to meet these bond-like liabilities, forcing them to accumulate even more fixed income instruments to try to meet their obligations, creating a vicious circle.

Falling YieldsRecent data on pension deficits highlight the plight of many pension funds. In the United States, funding deficits of the 100 largest DB plans rose $68 billion to $254 billion in July, according to the Milliman Pension Fund Index. July marked the 10th largest deficit rise in the index's 11 year history.

Even if these companies were to achieve an optimistic annual return of as much as 8 percent and keep the current benchmark yield of 5.12 percent, their funding status is not estimated to improve beyond 93 percent by end-2013 from the current 83 percent. Aon Hewitt estimates deficits of DB pension plans for FTSE 350 companies as of end-August rose 20 billion pounds from July to a 2011 high of 58 billion pounds. Their funding ratio stands at 89.8 percent, down from 94.1 percent three years ago.

The drop in the funding ratio is driven by a rally in the fixed income market. In Europe, the double-A rated corporate bond yield -- one of the benchmark rates used by regulators -- fell 300 basis points in the last three years to 3.55 percent, according to Barclays Capital. The widely used rule of thumb is that a 50 basis points fall in the discount rate roughly results in a 10 percent increase in liabilities. "Things look substantially worse now than they were during the credit crisis," said Pat Race, senior partner at investment consultancy Mercer.

In reaction to the past few years of an equity decline and volatility, many pension funds are indeed planning to buy more bonds, a move highlighted by Mercer's survey of over 1,000 European DB pension funds in May. "Trustees do want to de-risk but financial directors have irrational desire to have equities. They are too wedded to equity markets," Race said. "You still have massive uncertainties with a potential for another dip into recession. I don't see any reversion to days when equities are dominant part of DB plans."

JP Morgan's data shows pension funds and insurance companies in the United States, euro zone, Japan and UK bought $173 billion of bonds in the first quarter, boosting their bond buying for the third quarter in a row. At the same time, they cut equity buying for a fifth quarter in a row, selling $22 billion of stocks in Q1. In Europe, pension funds slashed their weightings for equities to an average of 31.6 percent in 2011 from 43.8 percent in 2006, while fixed income holdings rose to 54 percent from 47.8 percent in the same period, according to Mercer.

Equity Premium PuzzleGrowing pension funds deficits on corporate balance sheets may make it more difficult for companies to access credit and discourage firms which are already hoarding cash from spending cash to expand business.

For wider financial markets, the giant industry's gradual move away from stocks could hit equity risk premium -- excess return of equities over risk-free securities which compensates investors for taking on the relatively higher risk. This may reinvigorate an academic debate where some economic analysis suggests the equity risk premium should be small, in most cases less than half a percentage point, as opposed to the widely-used range of 4-6 percent.

Indeed, 10-year U.S. Treasuries gave higher total returns in the past 10 years on a rolling basis than world stocks. "The puzzle... is that for the past 20 years, there has been no net equity risk premium. With the recent sell-off in risk and the rally in bonds, I think there might have been a net premium on bonds," Stephen Jen, managing partner at SLJ Macro Partners, said in a note to clients. "This has turned financial theory on its head, and managers of pension funds and sovereign wealth funds need to think about this very carefully."

The 17 lawsuits filed Friday by federal regulators against some of the world's biggest financial institutions hinge on a simple premise: The mortgage loans that banks packaged into securities often didn't meet the underwriting guidelines the banks outlined in their securities filings.

The lawsuits, filed by the Federal Housing Finance Agency, allege that the banks made untrue statements and omitted key facts when they sold mortgage investments to loan giants Fannie Mae and Freddie Mac. The suits involve $196 billion in mortgage bonds packaged by some of the world's biggest banks. In addition to the banks, the suits name more than 100 executives who signed offering statements for the securities. Several of the named banks denied the allegations, didn't respond to requests for comment or declined to comment. The FHFA didn't specify how much it is seeking in damages.

Fannie and Freddie don't make loans directly, but they support housing markets by buying mortgages from banks and then selling them to investors as securities, providing guarantees to investors. During the housing boom, the two companies augmented their role in the housing market by purchasing privately issued mortgage securities as investments. It is those investments at issue in the suits. Analysts said the cases could ultimately turn on whether the FHFA can show that Fannie and Freddie, given all their expertise in evaluating mortgage risks, were misled about the quality of the loans backing those investments.

Citing detailed loan information, the FHFA lawsuits allege that the banks repeatedly misrepresented or made untrue statements about basic characteristics of loans in the securities, such as the portion of borrowers who lived in their homes and the percentage of the property's value being financed. Banks "routinely" packaged loans into securities even though they had been flagged by third-party due diligence firms as not meeting underwriting guidelines, according to the lawsuits.

"It's a great myth that you can't defraud sophisticated financial parties," said William K. Black, a former bank regulator involved with hundreds of successful savings-and-loan-era prosecutions. "Models cannot protect you against fraudulent loans" or inadequate disclosures.

The FHFA's review of a sample of loans in one Goldman Sachs Group Inc. bond deal cited in a lawsuit found that the portion of properties that appeared not to be owner-occupied was nearly double the amount stated in the prospectus supplement.

The banks are likely to argue that Fannie and Freddie knew that the loans were risky and that losses were due to underlying economic conditions, not faulty underwriting. "It will become clear that the plaintiffs knew as much as the defendants about the quality of these loan portfolios," says Andrew Sandler, co-chairman of BuckleySandler LLP, a law firm representing banks in litigation and regulatory enforcement actions.

Roughly a dozen investors and government agencies, including at least five federal home loan banks, American International Group Inc. and the National Credit Union Administration, have filed similar lawsuits.= Both the FHFA and NCUA have an edge over some other plaintiffs because they have subpoena power that has provided them with access to loan files.

Given that evidence from the loan files, "it would be amazing if these complaints do not survive motions to dismiss," said David Grais, an attorney in New York who represents several Federal Home Loan Banks in similar legal actions. Many of the other lawsuits are still in their early stages; most have survived motions to dismiss.

199 comments:

A very poignant essay from Ilargi today, even moreso that usual. You have cut thru the charts and numbers and stated in plain English our inevitable fate.

I would, however, like to cherry pick one quote that I disagree with: "Unfortunately, our societies simply don't have the political structures to make the right choices". This quote implies that a society exists somewhere that has the political structures to make the right choices. I would argue that this society exists in people's minds only.

I am still waiting for the Progressives to find the angels that will run their Utopian society that "makes the right choices".

I don't know what your personal dreams were about a supranational united Europe, but I see it from its start in the 1950's as propelled by the dreams of the Rockefellers and the Rothschilds. I for one would prefer my local petty tyranny of Boss Hoggs to one run by a cabal of ruthless, sociopathic bankers directing their minions to drop bombs as video games from half way around the world from predator drones on anyone with the misfortune of harboring crude oil under their feet. Also hope that The North American Union dies as a fetus in utero. But like Samson, the ruling cabal in an effort to save itself, its banks, and its power to control the lives of others, will pull the temple down on all of us.

But it is far too early to "mourn" for the death of a united Europe, or a future global tyranny for that matter. We are simply coming to the end of Act I. As both the I Ching and the scumbag Mayor of Chicago and former presidential chief-of-staff would put it, crisis is opportunity.

The British historian Arnold J. Toynbee, in his 12-volume magnum opus A Study of History (1961), theorized that all civilizations pass through several distinct stages: genesis, growth, time of troubles, universal state, and disintegration.

Toynbee argues that the breakdown of civilizations is not caused by loss of control over the environment, over the human environment, or attacks from outside. Rather, ironically, societies that develop great expertise in problem solving become incapable of solving new problems by overdeveloping their structures for solving old ones.

The fixation on the old methods of the "Creative Minority" leads it to eventually cease to be creative and degenerates into merely a "Dominant minority" (that forces the majority to obey without meriting obedience), failing to recognize new ways of thinking.

He argues that creative minorities deteriorate due to a worship of their "former self," by which they become prideful, and fail to adequately address the next challenge they face.

He argues that the ultimate sign a civilization has broken down is when the dominant minority forms a "Universal State," which stifles political creativity. He states:

“ First the Dominant Minority attempts to hold by force - against all right and reason - a position of inherited privilege which it has ceased to merit; and then the Proletariat repays injustice with resentment, fear with hate, and violence

He argues that, as civilizations decay, they form an "Internal Proletariat" and an "External Proletariat." The Internal proletariat is held in subjugation by the dominant minority inside the civilization, and grows bitter; the external proletariat exists outside the civilization in poverty and chaos, and grows envious.

He argues that in this environment, people resort to archaism (idealization of the past), futurism (idealization of the future), detachment (removal of oneself from the realities of a decaying world), and transcendence (meeting the challenges of the decaying civilization with new insight, as a Prophet). He argues that those who Transcend during a period of social decay give birth to a new Church with new and stronger spiritual insights, around which a subsequent civilization may begin to form after the old has died.

Toynbee's use of the word 'church' refers to the collective spiritual bond of a common worship, or the same unity found in some kind of social order.

"Rather, ironically, societies that develop great expertise in problem solving become incapable of solving new problems by overdeveloping their structures for solving old ones.

He argues that the ultimate sign a civilization has broken down is when the dominant minority forms a "Universal State," which stifles political creativity."

This view is also very much in line with Tainter's thesis that over-complex societies attempt to sustain themselves via increasingly complex solutions, which have diminishing returns and unintended consequences. On a similar note, CHS "commits" himself to the TAE premise of near-term dollar appreciation in his latest piece. He refutes the notion that "the East" has given up on the debt-dollar reserve system, by referencing the fact that seemingly diverse components of complex evolutionary systems become extremely inter-dependent and reliant on the central structures of the "Universal State".

CHS: "At some point the trade imbalance of $600 billion a year between the mercantilist nations and the U.S. will go away, as will the notion that printing paper money is creating wealth, and debts that are unpayable will magically be paid instead of being liquidated or repudiated. The point here is that the Status Quo of all the major trading nations is committed to conserving the present system of fraying imbalances, as their own wealth and power flow from this shaky, unsustainable structure."

"LONGVIEW, Wash. - Hundreds of Longshore workers stormed the Port of Longview, overpowered security guards, damaged rail cars and dumped grain at the center of a labor dispute that has spread to Seattle and Tacoma ports, officials said Thursday.

"Six guards were detained for a couple of hours after 500 or more Longshoremen broke down gates about 4:30 a.m. and smashed windows in the guard shack, said Longview Police Chief Jim Duscha. ...

"In Seattle and Tacoma, a wildcat strike shut down both ports after hundreds of Longshore workers failed to show up for work on Thursday."

"For future pensioners, it means they will potentially face a lower retirement income and a longer working life -- or both. This year has been a nightmare for many in the industry -- which controls $35 trillion (22 trillion pounds), or a third of global financial assets -- and funding deficits are posting double-digit rises."

Wow! Pension funds "control $35 Trillion in assets"!Anyone care to speak to the veracity of this statement?

>>All societies are the creation of people's minds. Ours is the creation of 18th century minds. Probably a little outdated.

Quite true, but totally irrelevant to the actual point that no society has ever worked the way its creators hoped. Those that were not intrinsically unworkable were thoroughly gamed within a generation or two.

Don't tell the Swiss, but the ones that have lasted longest all match the Internet's philosophy of "rough consensus and running code", not an actual plan.

Relatedly, @Ash, from last time. I get your point about slavery. But it's not just the framers. 40 years later, Clay, Calhoun and Webster held the civil war off for a generation by one kludge after another.

There were a bunch of really smart (yes, 99% white, yes 99% male) people who from the Plains of Abraham to the attack on Ft. Sumter, were either the best stooges the Rothschilds ever had, or were doing their level best for their country.

That was Ben Bernanke speaking at the Economic Club of Minnesota. I haven't yet found a link to the full video (they cut away to talk to Texas Rep. Joe Barton about petroleum and the wonderful fracking opportunities all over the country). From what I saw of the Bernanke, he was explaining why the economy didn't seem to be recovering from the recession. It was really priceless- he really has very little clue (or is paid to pretend as if that is the case) where we now stand, how we got here, and where we are headed.

"Authorities are preparing for around-the-clock monitoring of parts of some rivers in central Japan that have been dammed up by landslides. The earthfall was triggered by tropical storm rains over the weekend.

"The land ministry has confirmed 12 locations in Nara and Wakayama prefectures where huge landslides have created lakes.

"4 of them are at risk of bursting and causing massive floods.

"The ministry has therefore decided to drop special buoys by helicopter into the lakes to keep track of water levels 24 hours a day."---------------------------

The modern version of taking action, apparently? No, we won't go drain the lakes; but we'll watch, so we'll be able to say how high they were when they "burst, causing massive floods."

"Quite true, but totally irrelevant to the actual point that no society has ever worked the way its creators hoped."

Also an irrelevant point. Capitalism, as a quasi-scientific approach to society is built on known false assumptions, massive contradictions and has inherent critical blindness and hence is doomed to fail. You could not run a society on a more incompetent set of rules.

Seriously, trying to jump start the "consumer" economy. We collectively are stark raving mad. Not even in the same universe of sane.

A very ominous TAE post indeed. But I think we know it's a realistic enough possiblity to be warranted.

The part that haunted me was where Ilargi writes:, "So your children will once again be your pension plan, just like they were throughout the ages, and they still are throughout most of the world. They will have to learn their skills from their parents and communities. And yes, that is, provided they live long enough, that they don't succumb to afflictions that today are perfectly treatable but for which no provisions will be available."

It made me wonder about how a collapse would affect health care. I wonder if there's some room for an alternative scenario there. Because health care is so grossly inflated in price, and a deflationary collapse might bring many costs (for those with cash) down to earth. We won't LOSE the technology to treat treatable illnesses. And the cost of drugs might drop in price astronomically. Might there really be a sudden shortage of basic medical items like anti-biotics? I would assume they'd still be made and available to those who can buy them or trade something of value for them. A doctor will still be around to perform a surgery if you need it, but he won't be making the hudnreds of thousands of dollars a year anymore either. He'll have to cut out that tumour in exchange for a side of beef. Maybe I just want to believe that there will be medical treatment available. Because the prospect of suddenly living without it is too frightening. I just think that the technology isn't going to go anywhere, even if some of the factories shut down. There will be cheap, knock-off drugs being traded like mad, as patent-law falls apart and people need what they need. Most of the prices of such necessities are forced into an artificially inflated stratosphere anyhow.

"But it's not just the framers. 40 years later, Clay, Calhoun and Webster held the civil war off for a generation by one kludge after another."

Ah yes, very true. But now, the Great Era of Compromise may have finally come to an end. The article posted by IMN above at "The Slog" is quite brilliant, IMO. It's easy to "know what to do" when the commercial/financial markets are under-developed, quality land is abundant, ecosystems are stable, energy is flowing and resources are plentiful. In this system, there has always been a tweak at the margins, a concession to make, a resource to plunder, a technology to develop, a corporation to acquire, a way to superficially re-organize without fundamentally revolutionizing. Now, there is none. Nowhere left for capital to go but into the black hole of complexity.

Granted, there are probably at least some who know exactly what they are doing, are currently unphased by systemic deterioration and we can be sure that it's nothing good for humanity. But that's what they were doing within the confines of a rapidly aging system and a rapidly shifting collective psychology. As the natural dynamics of the system become more volatile and intense, will they still know what they are doing? I say, not very likely. Thank you IMN for directing us to that website.

It was my pleasure to introduce John Ward's thoughts to the TAE crowd. I kind of feel like he and I are fellow travelers. Just another geezer who knows things. Even if perhaps he cannot always prove them.

While the apparently never ending 15 minutes hate (toward capitalism) is still on, I will insert here my view on why it has come to the point of collapse.

Capitalism is really just a new name, with pseudo-religious connotations, for what humankind has been doing in various ways for millennia. It is my considered and moderately humble opinion that pretty much all the isms have failed us now because they fell in step with the underlying ethos of this epoch, which happens to be a Martial Ethos.

Contrary to widely held opinion, warfare does not create prosperity. It is invariably destructive to mores and socially useful investment. It is now observable that the Permanent War Economy of Usanistan is not going to be permanent after all.

They are trying this that and another thing, but as John Ward observed, they know not what to do. In my opinion there is nothing they could possibly do that would resolve the mess. At some point amidst uncertainty and chaos, society will reorganize under a new ethos that I don't think we can predict with much certainty.

We will undoubtedly be much poorer and many will die prematurely. In the mean time we can do little more than watch one of the most amazing shows humankind has ever put on. And over the ages we have put on some real doozies.

However we choose to define it or label it, the Dominant Paradigm has risen to preeminence because it displaced, destroyed, transformed or infected other paradigms. And I would agree that its success derives primarily from the skillfully organized violence that flows so naturally from this now Dominant Paradigm. None of this makes our way of life better or even inevitable. What is inevitable is that once set in motion, like the most complex Doomsday Clock ever conceived, the towering edifice of Growth-Driven Industrial Civilization was always guaranteed to collapse under its own unsustainable weight.

Ash: "In the mean time we can do little more than watch one of the most amazing shows humankind has ever put on. And over the ages we have put on some real doozies."

This year I successfully experimented with growing my own popcorn, now if I could just learn to make my own beer, I'd be set...

@IMN...IMNobody knows:) IMNobody knows that nobody knows what to do in a predicament.

Re Obama's jobs speech...so tragic to spend /use declining resources in our peak oil predicament to build roads. So sad to be building schools to make kids comfortable while they are being trained to work in a world that is no more.At best or maybe worst the younsters will have shiny new buildings in which to receive the redacted lessons on history. Better to teach the children how to grow food, sail a boat, countless other useful,life saving skills. My cynical side wonders how manycontributors to political campaigns are road builders or in the construction industry.The job plan must be a wet dream for the aggregates industry:) shish...it is kinda embarassing to witness this show sometimes.

""Capitalism is really just a new name, with pseudo-religious connotations, for what humankind has been doing in various ways for millennia.""

In some ways yes. As far as power centers were concerned. Capitalism just took imperial conquest a little further and dressed it up as enlightened. But to say it is what "human kind" has been doing for a miliennia is not accurate. It's institutionalized aberrant human behavior that was looked up to by the ruling classes through the ages.

In modern market economies the needs of the market determine social behaviour, whereas in pre-industrial and primitive economies the needs of society determine economic behavior.

Reciprocity has been the dominant human behavior throughout history(as well as the biosphere) - that people produced such goods and services for which they were best suited, and shared them with those around them. This was reciprocated by the others. There was an unspoken agreement that all would produce that which they could do best and mutually share and share alike.

Sometimes when I read TAE I just want to turn off my computer and go to bed.

SecularAnimist said:

Reciprocity has been the dominant human behavior throughout history..."

What about nose-picking, burping, and farting? And even if you really mean "economic" behavior, then how do you know? I mean, come on. How do you really know?

And what is your definition of history, anyway? Recorded? Theoretical, from the work of anthropologists, etc.?

In asking you these questions, I'm not offering an alternative, because I KNOW THAT I DO NOT KNOW! I suspect that the ignorance and delusion that give rise to greed, hatred, and illusion are at least as old as any meaningful record of reciprocity that you can find. You can find record of those three poisons from 2,500 years ago in Northern Indian and millenia before that if you rely on myth as your history.

Yes, give me some links if it will please you. I'm open to learning, for sure. But when I hear such inane, grandiose claims as this, I have to slap both sides of my head to get my eyeballs to roll back in place.

I share your distaste for capitalism for all its ills and the suffering it causes. However, reciprocity will not be our salvation, if there is any to be had. Reciprocity is only the manifestation of a different mindset, a worldview that is more unified, integral, and interdependent. My sense is that the worldview comes first; in fact, it may be a necessary precondition for reciprocity to flourish.

If we agree that capitalism is destructive, devisive, and a fragmenter of lives, what then? If "it"--capitalism in its present state--is bigger than my life, what then?

Because, you know what? Right now "it" is bigger than my life. And all this mindless chitchat and arguing about how many capitalist devils can dance on the head of a gold Euro are doing absolutely nothing to answer the question of "what then?"

HIstory, Schmistory. Some whacky Buddhist somewhere said, "The past is history; the future is mystery. Be here, now." I am not anti-history by any means, but I am much more interested in the question of "How can I 'be' here, right now?

Grandiose claims and arguments about the fundamental economic nature of humans just seem irrelevant, at the moment. A luxury for the fat days of yore.

Whatever the reason for events such as this latest wide-ranging power outage, it's yet another example of non-existent resilience in our overly complex systems and structures. A few connections get severed, and suddenly 2M+ people lose power across a large region, including some densely-populated ones. We rely on some conflicted and/or confounded private company execs and public bureaucrats to respond and make everything better, but who knows how long that will take and we know it is guaranteed to be a very superficial response at best. This is a system still fantasizing about the old days of "robust efficiency", while it sacrifices every last shred of local resilience.

And just as reciprocity was organic in it's arising, so, too was "capitalism." Sure it got codified and defined, but it also arose organically from causes and conditions. So discussing economic theory as a means of considering future alternatives to capitalism is a wonderful thing to do, I suspect future economic paradigms may arise somewhat organically as well. All over the place, in different forms, as the causes and conditions in different locales will be manifestly varied, I'm sure.

Thanks for those photos from the protests in Spain. Anyone else notice something strikingly different about hose pictures? The cross-section in ages is stunning. Normally protest photos show that the vast majority who turn up are under 35. These photos show that EVERYONE is turning up. There are a lot of people in their 50s and 60s in those demonstrations.

I too know that I don't know, but I did see an interview with Dr. David Graeber, who recently wrote a book called, "Debt: The First 5000 years". In the interview and the book Graeber covers what he found in his research regarding the origins of "debt" in societies pre-dating the use of money. Reciprocity and obligation existed as a form of debt, serving a great many purposes generally contributing to social cohesion as well as a form of commerce and exchange. Now, Graeber is an anthropologist as well as an anarchist and a Wobbly, so I'm not sure if that undermines his credibility in your eyes, and I haven't read the book, but from all appearances he seems to be a fairly legitimate academic.

http://www.youtube.com/watch?v=SnOqanbHZi4&feature=player_embedded

And for my money, I'd rather talk about how many capitalist devils can dance on the head of a gold Euro than whether or not gold will rise or fall this year or next. Then again, I'm not averse to discussing how to "be" here right now either.

PP, of course not. Graeber's anarchism and wobbliness don't bother me. In fact, I kinda perked up when I saw he was being interviewed on RT!

I'll try to get a copy of his book. The interview wasn't quite as supportive of reciprocity as it was of the notion of indebtedness. It made a lot of sense. A story...

I borrowed a friend's tiller. It was old, but it was also in excellent condition. I let it set outside in the rain. Six weeks later--last Saturday--he wanted it back. Before returning it I changed the transmission oil and the engine oil. When I went to crank it, it was seized up. Crap.

I pulled the plug and doused the cylinder with penetrating oil. Waited. Cranked. No response. Repeated twice more, and then finally got impatient. I gently placed a rag then my pipe wrench around the flange on the crankshaft, hoping a little pressure would do the trick. It did the trick alright. Something let go inside the engine with a "snap!" Now the crankshaft turns but the piston doesn't. Broken crank or connecting rod, perhaps.

Well, naturally I felt indebted to my friend. So I pursued it, trying to find 1) a reasonably-priced repairman, 2) a replacement motor, or 3) a rebuilt motor. None of the above to be found. So here's what I did: I bought him a new tiller. It's coming in tomorrow, and I'm $1300 poorer than I was last Saturday.

But, he has a new tiller, he'll continue to let me use it, and in a way, now he's indebted to me.

I have been reading your essays for what seems a very long time now.This is one of your best.Be careful,your heart of hearts is showing. I stopped dreaming of great wealth and power a long time ago,when I realized the price you pay for such things.We have been kicking around the word "sociopath"for awhile...it could be summed up,as most human behaviors can,by learned response,although many feel the these behaviors are part of the organic package that we carry from prehistory.My own thoughts are that they may be part of the package,but schools of "economic training"MBA business schools that teach cutting the heart out of your competition and eating it with relish,as well as destruction of unions,ect."Human Resource"training that teach how to spot "unprofitable" employees,ect have much to do with the development of what appear to be bone-mean,perverse,sick puppies in the top levels of corp.management,who,due to the constant inter-exchange of between top levels of .gov and top corporations, end up with way way too much influence in our lives. Were it just me,I would just smile a sad smile and watch the destruction of this nation with nearly equal measures of pain and relief,knowing the power of the corporations will be broken when the country that brought many of the most egregious into existence morphs into whatever we become when the phase-change we're headed into gets into full swing.I am not one of those who believe that corporations,as they now exist,will survive in their present form.I think that their will not be the physical,mental energy to make things work as they do now.

Things that I do not approve of will not be done in my name,in foreign lands in the name of "National Interests"...to promote extraction of whatever resource someone is trying to steal.

Were it not for my grandkids...

Since my step-daughters marriage blew up,the kids spend lots more time with Mrs.snuffy and myself. A girlchild,7,with cartoon sized eyes,and a clear mind ,sharp as a tack.Always with a 300watt smile.She could light up a mine with that smile. A boy,11, handsome and lanky,whos eyes stare back with a quiet contemplation that makes know there is a lot more going on in his head then just what he says.He THINKS...which has given me the task of figuring out how to help him learn how to learn...

Last year I showed them the basic garden steps...they planted,watered,weeded,and ate a meal of green beans...they had grown. This year trips to museums,zoos ect.Swim lessons.BB guns.A mountain of art supplies.

This Christmas,computers,and web access in their home.

But where we are headed to,sweet mother of Christ.. What do you teach a kid to live thru a collapse?. What do you teach kids who have to live in the ruins of a empire?.

I just read the article on Graeber's dismissal. I had never heard of Dr. Graeber before now, but he does seem like one hell of a good guy. What he said here seems to me to be applicable to our society at large today:

"One thing that I’ve learned in academia is no one much cares what your politics are as long as you don’t do anything about them. You can espouse the most radical positions imaginable, as long as you’re willing to be a hypocrite about them. The moment you give any signs that you might not be a hypocrite, that you might be capable of standing on principle even when it’s not politically convenient, then everything’s different. And of course anarchism isn’t about high theory: it’s precisely the willingness to try to live by your principles."

Well put, and I'd say this applies just as well whether you are talking about politics, business, churches, or even the Peace Corps (I can speak to this one from personal experience).

Why not? That seems about it as close as it gets in our modern society. You have dipped into your savings, which reflect your previous productive efforts (unless it was speculatively borrowed money, which I doubt), to provide your friend with a new Tiller, because his old one was damaged in your possession. He had provided you with a service that he had the means to share, and while no formal obligations had to be made in the transaction, you voluntarily decided to reciprocate the generosity underlying his original action by contributing your productive efforts towards giving him an even better machine. Now, he has informally "indebted" through your act of reciprocity, and may choose to further reciprocate if your future needs warrant it. Of course, he may choose not to, and that's fine, but the point is that a reciprocal social arrangement has been established that is economically productive and rational and involves no formal coercion by third party actors.

As the father of children aged 3.5 and 10 months, I can identify with how you feel regarding, "What do you teach kids who have to live in the ruins of a empire?."

My son is the older of the two, and so we are only at the point of trying to teach him the basics of appropriate behavior- but always in the back of my mind I am thinking about how to balance a desire to raise the kind of young man who can find a balance between kindness and compassion on the one hand and resilience and courage on the other. I don't want him to grow up mean or hard, but he may very well have to face more in the way of hardship and danger in his lifetime than I will in the next 35-45 years that might hope to be around.

Like you I hope to impart as much of a wealth of practical skills and knowledge as I am able, but as important as those things are, I think we both know that our kids face a far more uncertain future than we ever did at their age.

Reciprocity has been the dominant human behavior throughout history..."

Like my uncle once said about his sister. "She has a memory so good she can remember things that never happened." SecularAnimist seems to have a similar capacity with regard to things that happened before his time.

Supposedly being secular and animist isn't really a valid excuse for ignoring the fact that the Ten Commandments were laid down well over two thousand years ago. Our ancestors were not nearly as different from us as he apparently likes to think. And why would they be? How far could our DNA have drifted in that many generations?

It is easily observed, if you bother to look, that humans as well as a great many animals, are adaptable. When Martial values are the foundation of social order all kinds of abhorrent behaviors are not only accepted but glorified. MBA's are people too and their can be little doubt, based on observed behavior of a limited number, that they are encouraged throughout their educational experience to gut their enemies. From top to bottom the minions of business speak the language of war. When the pink slips fly, the industrial dogfaces take it like good soldiers should. That's why there has been no revolt. They are too loyal to engage in mutiny.

Capitalism is just the ancient bazaar on steroids. Humans have long had a penchant for trading and accumulating. Stoneleigh spoke a great truth when she identified corruption as being the system. What she failed to stipulate is that it has always been the system. Periodically the ethos shifts and for awhile society is able to dodge much of the corruption while the corrupt figure out how to game the new environment.

I don't give a damn about Au but for those who do. Terry Jones in his documentary Medieval Lives reveals the secret chamber under the Papal Treasure Room where the Pope hid his gold. For those inclined to hold it, I suspect the hypocritical bastard probably knew what he was doing. Following his lead would seem prudent. As I have stated before, when gold is money it seems happiest back underground. I agree with CHS, as long as we are trading the dollar has life. When we stop trading it won't matter.

The cross-section in ages is stunning. Normally protest photos show that the vast majority who turn up are under 35. These photos show that EVERYONE is turning up. There are a lot of people in their 50s and 60s in those demonstrations.

Skip Breakfast,

Yes, I noticed that and also the fact that there were lots of women and even small kids. However, it is just a matter of time before things deteriorate and, like in Athens, it will be strictly for young able-bodied males.

Also, I suspect a lot of the older people who are participating - my cohort - are there because they would never have dared do anything like it in their youth - not with Generalissimo Fransisco Franco at the helm. A sort of belated catching-up. :)

Enjoyed your rant. Agree with most everything you said, especially the bits about how certain can we be about "how things were" in the distant past.

progressivepopulist -

Regarding yours (and others) thoughts on gold:

I understand your feelings about gold. From what you have said of your situation, its really not relevant to you.

We all worry about different things that will happen in our upcoming trials, and those concerns stem from our individual situations.

And some people like big picture system analysis, and some like micro "how do I grow popping corn" topics. Some are single, some are married with families. Engineers, sales, artists, farmers, mechanics. It takes all kinds of different sorts of thinking to make the world go round.

My mom is a retired teacher, has a pension, and has some savings. The (modest) CALSTRS pension - not something I'm counting on forever. I can't get her to raise chickens or move to a farming community - even getting solar power for the house was hard. Paying down debt, largely successful. Making a nice "earthquake kit", done. So she relies on me to figure out how best to keep her savings from vanishing. And thats where the "safe haven" subject comes up for me. Inflation or deflation. Systemic collapse. Cash on hand. And so that's what I think about.

Don't forget what Ilargi said regarding your kids and your pension. :)So your children will once again be your pension plan, just like they were throughout the ages, and they still are throughout most of the world.

I trying by best to rescue my own son's education and get him to learn something useful. If nothing else, I let him know that Norway's oil is depleting a lot faster than their newspapers are letting on and that there won't be much of it coming out by the time he should/might be finishing his studies. I also let him in on the secret that their Oil Fund (Oljefondet) is really just a way of swapping real wealth, oil, for bits of American papers. I told him years ago that it won't be there when the Norwegian people need it.

Of course, the Oil Fund delayed admitting that it had been robbed for as long as possible. They were forced to join the litigation queue as BofA is going downhill fast. Doubtless, they have many other "investments" that are still being carried on their books at 100% of their book value.

I see that the word reciprocal—the root of reciprocity—has a range of meanings: given or felt by each toward the other; given in return; expressing mutual relationship or action; and—of course—inversely related or proportional (opposite).

There is another definition with which I was previously most familiar: corresponding, matching, complementary, or equivalent. As in North Carolina has reciprocity with Virginia in regards to teaching certificates for public schools.

I would agree that my tiller story exemplifies some of the meaning of reciprocity, as you suggest, but not the notion of equivalence, that last definition. The exchange that occurred between my friend Anthony and me is somewhat more unequal; it involves a type of “indebtedness” referred to by Graeber in the video that progressivepopulist recommended. I no longer feel indebted to Anthony regarding the tiller; if anything, I feel that now he will be somewhat indebted to me. Of course, he may feel otherwise; I should check! ;-)

Semantics. A bitch. Especially when I get my feet tangled up in it!

How many semanticists can shadowbox on this ( . ) period? Isn’t it funny how words mean both everything and nothing at all?

it seems to me that the reciprocity abc's are a useful distillation of human behavior. reminds me of the usefulness of cause and effect.

"Reciprocity is only the manifestation of a different mindset, a worldview that is more unified, integral, and interdependent. My sense is that the worldview comes first; in fact, it may be a necessary precondition for reciprocity to flourish."

or it could be genetic behavior, with our massive, propagandized culture being the multiplicative inverse borne of mutagenic civilization.

Voltaire had something to say about this at the very beginning of Candide:

On her way back she happened to meet the young man; she blushed, he blushed also; she wished him a good morning in a flattering tone, he returned the salute, without knowing what he said. The next day, as they were rising from dinner, Cunegund and Candide slipped behind the screen. The miss dropped her handkerchief, the young man picked it up. She innocently took hold of his hand, and he as innocently kissed hers with a warmth, a sensibility, a grace-all very particular; their lips met; their eyes sparkled; their knees trembled; their hands strayed. The Baron chanced to come by; he beheld the cause and effect, and, without hesitation, saluted Candide with some notable kicks on the breech and drove him out of doors. The lovely Miss Cunegund fainted away, and, as soon as she came to herself, the Baroness boxed her ears. Thus a general consternation was spread over this most magnificent and most agreeable of all possible castles. :)

bosun:"What about nose-picking, burping, and farting? And even if you really mean "economic" behavior, then how do you know? I mean, come on. How do you really know?"

I'm talking about social relations. How do I really know? Well that would be the work of many anthropologists, economic historians and other academics in associated fields. Symbiosis is the dominant relation between organisms in the biosphere, so it makes sense that cooperation is the dominant human behavior. Actually according to Evolutionary biologist Lynn Margulis cooperation is the driver of evolution. Contemporary understanding, which is expressed and institutionalized, through economics may just be upside down. Pretty simple really. If we collectively keep telling ourselves incorrect information, it leads to destructive behavior.

"I suspect that the ignorance and delusion that give rise to greed, hatred, and illusion are at least as old as any meaningful record of reciprocity that you can find."

You can track Imperial conquest back to about 5000 BC when the Indo-Europeans came out of southern russia and transformed the world. Transforming egalitarian, early civilizations to hierarchical war based societies. I would be willing to bet this behavior was caused by an environmental stress such as crop failure, or something of that nature. Humans,being the superstitious beings they are, ritualized and enshrined this behavior. Which also caused all other societies to take this posture and structure.

Which led to the reoccuring empire systems. The enlightenment philosophers took this behavior(which they deemed as superior) and institutionalized it with capitalism. Exacerbated exponentially by the industrial revolution and the confusion of capitalism has caused a regression to a more primitive form of species organization and behavior.

With the unprecedented growth of material "wealth" made possible by the exploitation of fossil fuels, and the modern economic focus on "profit" rather than social need, global humanity has further regressed into a highly hierarchical, non-egalitarian, and ecologically-destructive species that is literally setting the stage for it's own extinction.

""Yes, give me some links if it will please you""

It's not that easy, BC. Dozens of scholars and books that equate to thousands of pages is not something you can link.

""Grandiose claims and arguments about the fundamental economic nature of humans just seem irrelevant, at the moment. A luxury for the fat days of yore.""

au contraire. It strikes me as the perfect time. It's never too late to stop acting like idiots, is it? Or garner a deeper understanding. Actually, I would say it's vital at this time period. Urgent, even. Simply put, it's never too late to point out what is driving destructive behavior. And no, it's not human "nature". Sorry, IMN

It strikes me as a little more productive than constantly obsessing over the, largely irrelevant, minutia of the flows of capital, the machinations of our overlords and convulsions of a dying society. All somewhat important, but certainly should not be the entire focus as a responsible human being.

See, we're confused on a grand scale. Understanding that what we have is an institution of our own creation, makes it apparent that we hold our own destiny in our hands; it's not an invisible hand that acts through our very nature, and thereby removes our free will to be otherwise, but rather a confusion waiting to be transcended.

Now, I know the throwing our hands up in the air and lamenting about the tragedy of the human experience plays well in these parts. But, seriously, doesn't it get tedious after a while?

@SA,,,I,too, am frustrated by the analysis of social systems in the predicament simply because the understanding that I am embedded in the matrix overwhelms me. Your words, " a confusion waiting to be transcended " are inexplicably compelling. I think it was bonsuncookie who underscored the need to be present in the here and now. This stance is perhaps the way to transcend the confusion.

Bloomberg: "Chancellor Angela Merkel’s government preparing plans to shore up German banks in the event that Greece fails to meet the terms of its aid package and defaults, three coalition officials said. The emergency plan involves measures to help banks and insurers that face a possible 50 percent loss on their Greek bonds if the next tranche of Greece’s bailout is withheld, said the people, who spoke on condition of anonymity because the deliberations are being held in private."

Meanwhile, the teleprompting US version of a bankster crony who pretends to care about "the people" is busy yapping it up near my home in Richmond. Needless to say, I'm not going to waste a minute of my time going out to listen to him.

Yes, Scandia, we are powerfully imprisoned simply by the terms in which we have been conditioned to think. The prison is crumbling and most that see this still cling to their cell bars.

I would agree that we are powerfully imprisoned by thought. Absolutely! But an individual’s imprisonment, it seems to me, goes much deeper than any received ideas about power, society, economies, systems, etc. Our imprisonment begins with thought, memory, and language.

Our great ability is to abstract information from our environment, encode it for memory, store it, retrieve it, and share it. That ability is also our downfall, because when we abstract, we begin to create dualities that work to separate us from one another and our environment. Our limitations prevent us from seeing and understanding a number of important factors of existence: 1) that change and process are at the heart of our universe; 2) that the change we do see is governed by an infinite net of causal conditions and relationships; and 3) that everything is interdependent.

This ignorance arising from our cognitive limitations leads us to falsely believe that some things can be made “permanent,” we can lead a life free from the animal suffering of existence, and that our very self has an inherent permanency. And even as our life experiences repeatedly offer us difficult lessons about impermanence, suffering, and no-self, we continue to grasp after that which falsely offers us the opposite. The grasping manifests as greed, hatred, and delusion.

This entire process starts with conventional thought (starting with the first word learned!) and is aided and abetted by conditioning and habit.

Liberation from thought imprisonment begins by breaking the chain of erroneous thought that is embedded in the idea of separateness. Learning how this works in our lives, practicing stopping the chains of erroneous thought, and then fully realizing a more integrated way of being in the world are the way out. Theory, practice, and realization. Much of this work ultimately moves beyond words.

It is individual work. But it can be encouraged and cultivated. My children are in their 30’s now, but if I had younguns come into my life right now, these ideas would be what I would model and try to impart. It's what I tried to sneak under the radar as a public school teacher. The result of this individual work is a person who is less “bothered” by externals. Worlds collapse, dollars fall and rise, gold gets buried and retrieved, and the individual equipped to see things just as they are is able to think, choose, and act from a place of wisdom and compassion, even amidst the pain of contraction, shortage, violence, or loss.

Or so it seems to me.

Another quote by SA:

au contraire. It strikes me as the perfect time. It's never too late to stop acting like idiots, is it? Or garner a deeper understanding. Actually, I would say it's vital at this time period. Urgent, even. Simply put, it's never too late to point out what is driving destructive behavior. And no, it's not human "nature". Sorry, IMN.

Absolutely! Agreed again! It's never too late to garner a deeper understanding. But the understanding that needs to arise is about the fundamental nature of thought itself. THAT is what is driving the destructive behavior, not Capitalism or Corporatism. Those are mere manifestations of a much deeper ignorance. And I'm with IMN here, in the sense that because we abstract from nature using dualistic thought from Day One with grotesque consequences all down the line, then greed, hatred, and delusion ARE human nature. But not irrevocably so!

The good news is that we also have the capacity to self-evolve and re-shape our nature! We also have the capacity to share our learning with others. Imagine a tribe, a clan, a culture where the dominant paradigm included full understanding of these concepts! What wisdom, what compassion would emerge!

"I would agree that my tiller story exemplifies some of the meaning of reciprocity, as you suggest, but not the notion of equivalence, that last definition."

I think it's best to understand reciprocity as a social mentality having no specific level of reaction required for any given action. It could be less, equivalent or more. After all, the underlying notion is that there is really no aspect of external coercion in the relation, only the internal "coercion" by one's own sense of obligation to another.

re: your last insightful post to SA

Would you say that the duality inherent in human thought, memory and language is more easily "managed" (or embraced) in less materially complex societies, since more complexity lends itself to a greater level of psychological abstraction from natural non-linear dynamics of evolutionary change? If so, then would it be fair to say that systems of socioeconomic organization which exist (or have existed) at "smaller" scales are less prone to institutional forces of fear, greed, corruption, ecological imbalance, etc.?

I would agree that decreases in the complexity of life make taming the mind much easier. Of course, a certain level of minimal creature comfort is presupposed. (It would be difficult to care about your untamed mind when you're starving, I would imagine.)

Most of the techniques that have evolved for this inquiry into the nature of the mind, thought, and existence presuppose a certain level of minimal calm and quiet. Much more difficult to practice on the trading floor than a quiet room in your home, for sure.

I suspect the future will be noisy-er in some ways and quieter in others. That is, less motor whine but more thrashing about for food, perhaps.) But in general, preoccupation with materiality works against the concentration and mindfulness required to see things just as they are.

That's my take, at any rate.

BTW, I'm liking your reciprocity definition, and it probably matches what SA had in mind, in spite of my mini-rant.

Also, thanks to Ben for the link on the reciprocity ABC's. Much food for thought there.

In a sense, all behavior is human" nature" which is all contingent on our environment. These things are manifestations of unhealthy environments - which is essentially the world - and getting more so.

Sure, we confuse our current primitive regression for a progressive "enlightened" development, we confuse powerful cultural stressors for personal and social benefits. Among those stressors are inequitably distributed essential resources with even more inequitably distributed unessential wealth, and a constant culturally-induced striving for perennially unsatisfiable desires that often conflict with basic bio-social needs.

Your rants,and responses have given me a lot of food for thought about my own situation with the grandkids.I am not real clear on how one would try and change what appears to be the dominant paradigm...self,and separateness...this seems to be tied closely to how a kid becomes a "adult",in today's world by establishment of boundaries... with the parents,friends,and acquaintances. When Jessica,their mother came into my life...It was as if I saw myself 20 years earlier.Angry.Smart,and bright enough to know she had been born in the wrong bed for the society she had to live in.[We actually became friends when I gave her 5 bucks for some green hair dye...to match her green boots...mrs snuffy was not amused[!]] Why does it not surprise me you had some time as a teacher...

Trying to show the world to young minds..I have always looked at that as a incredible responsibility...But after finding out some of the lesser known goals of some "Pioneers of teaching"I.E creating a compliant work force that doesn't "Think" too much for their station in life...and those goals being used.. savagely,to dumb down the population..I now look at the education of the grandkids as a personal responsibility.I think the goal will be to learn how to learn,as well as how think critically about an Idea...so that maybe they don't fall victim to the slogans and propaganda that fill our world now..I am going to have some research time on this one...

"Liberation from thought imprisonment begins by breaking the chain of erroneous thought that is embedded in the idea of separateness."

Indeed, All the cultures in human history except the Western industrial civilization have held holotropic states of consciousness in great esteem. They induced them whenever they wanted to connect to their deities, other dimensions of reality, and with the forces of nature. I suggest about 4 grams of psilocybin mushrooms to achieve this.

I also believe that the ability to think critically is prerequisite to learning how to see things just as they are. You gotta be willing to consider that things as-they-appear may be delusional before you can even entertain the idea that there may be a different way of seeing.

I got out of teaching because the pressure to teach kids to conform and be mindless automatons was more than I could resist. That and the fact that public education--or my school system at any rate--was not an endeavor of integrity. Regardless of the vision or mission, the critical decisions always came down in favor of survival-of-the-institution as opposed to teaching kids to think for themselves.

Kind of like society at large, huh? No different from politics, finance, corporate life, etc. Vive l'institution!

So, the next time you hear someone comment about the deplorable state of public education, just remember that public schools are nothing more than a mirror for society at large.

Best wishes for meaningful interactions with those young people. I found that as a teacher, my authenticity as a human was a first step in helping kids become the author of their own lives. Second step was listening.

SA, I'm taking a different position. It seems that a current feature of Homo Sapiens is to observe, abstract, conceptualize, encode via language, store, and retrieve in a specific manner (with subject-object duality) that is independent of environment and therefore fundamental to what it means to be Homo Sapiens at this time. Caveat: that feature doesn't seem to arise unless a human is around other humans, I'm pretty sure.

Thus, an obscured mind is not a product of "the environment." It is an aspect of a species that has evolved to communicate in our particular way. That is why I'm calling the abilities mentioned above both a blessing and a curse. The real blessing is that we ARE adaptable and capable of self-evolution in our own lifespan.

As for holotropic (not ordinary) states of consciousness, they may also be invoked long-term(with practice and without the aid of psychedelic substances) for equanimity of things-just-as-they-are (ie: happiness. It is not necessary to use chemicals to reach a non-ordinary state of consciousness that sees the world clearly.

Check with Latturi about the rowing experience. A small taste, perhaps? (Hope my spelling is correct.) Such periods of at-one-ness may be extended and brought into the humdrum of ordinary life. And it doesn't require the dismantling of Capitalism to achieve those states, although I'm for that as well.

I think. Not really sure what to dream about at the moment, since the post today concerns dreams. Mostly I just want to be less of a source of suffering for myself and others while trying to have some bread and a roof without too much drama.

Oh, and be happy (present with things just as they are) of course! Tall order.

There are 23 varieties of "LBMs"the"Little brown mushrooms",including "the liberty cap"noted for a easily identifiable "tit"on the very top of the cap...[we have been warned of]...and many many folks "collect" ...here in Oregon.There is a German word that translated means "Mushroom drunkenness",which is a lot closer to what is sought by those seeking spiritual awakening by eating shrooms.

Much of what he says seems to be along the same lines as TAE. I am curious as to what others here think of his work, and the difference in his analyses from that of TAE.

He does appear to view sovereign debt (in countries like the US and UK, not Europe!) as a very different issue than personal debt. If I understand him correctly, he does view personal debt enslavement of the "working classes" by the "financial class" to be deliberate policy of the financial class to trap all economic surplus in their unproductive web, preventing investment in productive capacity. But he often seems to minimize the issue of soverign debt, in states that control their own currency (unlike Eurozone)

He also appears to view the depression as deliberately, voluntarily imposed.

As the great American semen spiller would put it, "I feel your pain." As a Plumber of the Caribbean, I went through this problem with many small archaic dinghy outboards. I got my best remedial results by pulling the head, putting a mm or 2 of Liquid Wrench or Blast! on top of the piston, finding a 1 inch dowel, and tapping lightly with a 16 oz hammer in synch with Bob Marley & the Wailers for as long as it takes to free up the piston. Regarding your rant, ¡Rat ON!

As to human nature, if we define humans as being around for 150,000 years, according to Cannibals and Kings, we did not see economic exploitation until the rise of the city state. In a hunter gatherer society, the big men tended to be poor because they donated their stuff to the potlatches which would raise their status. And they had no coercive power over the men who formed their faction. So if we give a generous timing to the rise of the city state to say 7500 years ago, then economic coercion has existed anywhere on the globe for only 5% of the human existence on the planet. One should be wary to take lessons on human nature from 5% of human historical precedent.

In the back to the future department, Dmitry Orlov gives a nice one hour video presentation where he deals with the importance of reciprocity, not only hunter gatherer societies, but current third world agrarian societies. Well worth the watch.

I am getting tired of pundits of the Austrian persuasion, such as Mish and Durden, calling the Bernanck an idiot. I think he has a very,very good idea of what's going down. I see two major viewpoints in this; either the Bernanck is an idiot or a consummate liar. Just as I&S find it much more useful to define inflation as the change of the sum of money and credit times velocity rather than price changes, it is far more useful tool to assume that Bernanke is intelligent and well informed and playing rope-a-dope, because it is the best way to hide his true agenda. The last thing that one would wish to do in a war is to assume that the commanding general of the opposition is an idiot, unless you really have irrefutable proof of it.

Also, the euro is currently imploding downward in free fall. My theory is that it is doing it in honor of the tenth anniversary. History rhymes.

scrofulous (previous thread)

I would be very wary of investing in equities which have a history of paying good dividends once the crash is underway. Dividends are based on profits and there will be damn few of those in the crash. Prechter's DOW 1000 in four years is not inconceivable. Could be the old catch a falling knife blade, so popular in the real estate business.

I get the feeling that you do not accept the degree of collapse in the US economy, including the equities markets, that I&S foresee. That of course is your privilege.

While I believe that the USG defaulting on its treasury debt will mark the end of the dollar, I see defaults on the FDIC, so-called entitlements, and Fanny and Freddie preceding by much time any default on treasuries themselves. As to people running to gold or then yen, the latter will be too radioactive by then to approach, even symbolically. As to gold, rather not go there again.

I.M.N.

"MBA's are people too." Catchy title for a children's picture book. Least we forget :-)

""But the understanding that needs to arise is about the fundamental nature of thought itself. THAT is what is driving the destructive behavior, not Capitalism or Corporatism. Those are mere manifestations of a much deeper ignorance. ""

Wholeheartedly agree. It's the capitalistic mind which is just a grand narrative. Which the west has been infecting the world with for some time now

Though, modern scientific understanding has destroyed that narrative.

The Big Theories Underwriting Society Are Crashing All Around Us -- Are You Ready for a New World?http://www.alternet.org/story/145394/the_big_theories_underwriting_society_are_crashing_all_around_us_--_are_you_ready_for_a_new_world

Greenpa: That strike in Longview is interesting. That's a true blue-collar town that's been decimated over the past 20 years. First the lumber mills, then misc manufacturing plants, shutdown of nuke facility nearby, and now the further economic crisis and housing collapse. It'll be interesting to see how this plays out "On the Waterfront".

Snuffy: "But where we are headed to,sweet mother of Christ..What do you teach a kid to live thru a collapse?.What do you teach kids who have to live in the ruins of a empire?."

Yah. I have two things I try to teach mine, all the time. Probably more than that; but these occur at the moment.

1) I'm still looking for answers, too. I've got bits and pieces, here and there, but it's an ongoing process.

2) Don't be afraid.

#2 is a hard one; we ARE, all, afraid. But there's another level to it; where comprehending that this fear is part of the picture- for us all- you can get past it; and let it go. The point is to not let if paralyze you, or make you stop looking forward, or stop working to move forward.

That and a good marketable skill; like sheep shearing, and they're all set, you can tell them.

The thing is FERC and NERC (the regulatory bodies in charge of this stuff) have huge amounts of laws/protections in place to prevent all this. And it still happens. All it takes is one guy in a substation in AZ to make a mistake... There are thousands upon thousands of miles of high-voltage lines and unmanned substations across the country. To think our grid is "safe" is a major leap of faith. Even without terrorism (domestic or otherwise), the whole shebang is pretty fragile.

BTW - FERC has $1M/day/violation penalty authority. They fined FP&L $25M for a blackout in 2009 that was smaller than this one. I'm thinking the penalties here will be in the range of $50M to AZPS or the Cal-ISO or some combination thereof.

Snuffy: You don't teach your kid how to get through a collapse. He either knows or he's dead pretty quickly.

Here's the thing people don't get: When people start talking about "the math doesn't work" (be it charts or Karl Denninger or what have you), they don't get, on a conceptual level, that for it to work, you have to get "there" from "here"...

And the problem with that is that you have to basically deal with every person living now -- and tell more than a few of them that they are pretty much dead and should assume the (fetal) position.

"I am getting tired of pundits of the Austrian persuasion, such as Mish and Durden, calling the Bernanck an idiot."

On a somewhat similar note, I'm getting extremely tired of Durden's constant so-called "libertarian" commentary, which is essentially a cover for neo-feudalism. The claim that the debtor EU nations "hold all of the trump cards" and that their populations have not been and/or will not undergo significant austerity, regardless of whether the bailouts occur, is absolute garbage. It's one thing to be sensationalist, which itself is very annoying, but another to be deliberately misleading for the sake of your "free-market" ideological purity. I'm not surprised that people are "taking sides" in such a manner at this precarious stage of the game, but still I think it's something worth pointing out.

THAT is what is driving the destructive behavior, not Capitalism or Corporatism. Those are mere manifestations of a much deeper ignorance. And I'm with IMN here, in the sense that because we abstract from nature using dualistic thought from Day One with grotesque consequences all down the line, then greed, hatred, and delusion ARE human nature. But not irrevocably so!

To expand on this point. Sure natural is any emergent behavioral manifestation. The opposite of natural would be impossible.

Still, it's this capitalistic narrative or today's collective mind AND structure that causes the destructive behavior.

It's also this mind and structure that is breaking down - globally

It's a collective identity crisis about to into hyper-drive.

Still, the question is not what social behaviors are "natural" - it's what is healthy.

Quite clearly, our task is predominantly metaphysical, for it is how to get all of humanity to educate itself swiftly enough to generate spontaneous social behaviors that will avoid extinction.

Jal, I get the joke and I like it. It's kind of a funny play on words and concepts. What I don't get is the connection with either of our related comments. The only connection I see actually bears out my point. (How convenient, right?) Help me see your connection, please.

El G, sure do wish I had talked to you early last Saturday about cylinder-freeing methods!

The way things have played out in terms of the Eurozone, it is rather hard to believe that it wasn't planned years in advance. What did the MotU think when they gave the PIIGS unlimited credit at one third the rate they had been used to? Of course they would go on an unsustainable binge. Which was great for credit expansion of the giant banks. Until the debt got too big to repay and repair. No problem. Shift it to the government, put the people into debt slavery both directly and as taxpayers. Cheaper than military conquest. But maybe they overplayed their hand as the looming sovereign defaults are threatening the senior bondholders of the giant banks - our lords. Well put the Germans, Dutch, Finns, and French (and the Usanistanis as the Bloomberg suit of the Fed just revealed) into debt slavery to prevent the MotU from taking a hair cut. That is where we are at now.

The economic philosophy (Greed is Good) that the libertarian right (such as the Randers) subscribes to inevitably leads to crony capitalism. So the way I figure it, the Durden's of the world are smart enough to figure that they are getting screwed by the kings of the hill and decry their shenanigans. But if they could only take their place then everything would be cool. You don't hear Durden ranting against the resource wars and empire, my first test to mark the "good" libertarians from the "bad" ones. I will give Mish some credit in this regard despite his general, starve the peasants, approach to remediation.

The problem with these people is that they are very adept at judging what is going on in a technical sense, so I hold my nose and read it or listen to it. Gordon Long is a fabulous technical analyst, but his loudmouth podcast buddy, Ty Andros is unbearable as well as ignorant. Kind of like reading a 1960's Pravda criticism of capitalism. Very accurate until they start to describe the socialist paradise. ZH does also have some really good guest commentators including George Washington, Banzai7, Cognitive Dissonance, and he does publish CHS though I prefer to read him directly.

Our limitations prevent us from seeing and understanding a number of important factors of existence: 1) that change and process are at the heart of our universe; 2) that the change we do see is governed by an infinite net of causal conditions and relationships; and 3) that everything is interdependent.

I agree with everything you state here. However, I don't think we have "limitations" to understand this. Modern science has shown this interconnection and interdependence of the whole of life. This has become broadly accepted in the biophysical sciences. This is undeniable in the most basic sense, and it is this perpetual 'relationship' of total interconnectivity that is not fully realized by society overall. Thus, our modes of conduct and perception are largely out of line with nature itself... and hence destructive.

When we understand this symbiotic relationship of life, we begin to see that as far as 'relationships' are concerned, our relationship to the planet is the most profound and important. I would say this 'relationship' is mirrored with each other, systemically.

""This ignorance arising from our cognitive limitations leads us to falsely believe that some things can be made “permanent,""

I agree that language is, I guess, an obstacle. I also agree that we falsely believe things can be made permanent. However, I don't think this comes from language per se.

Fluid social change can only materialize if our human value system, which consists of our understandings and beliefs are updated and changed. It should be a process. We have not changed our belief system in 300 years. While science has passed it by.

Our main "limitations" are institutions that do everything in their power via mass communications to appear valid - when they are not.

I just want to be less of a source of suffering for myself and others while trying to have some bread and a roof without too much drama.

I understand But, the global increasing dysfunction and systemic gravitation towards deeper states of social unhealthiness is kind of hard to disconnect from. Frankly, I'm not sure if it is healthy to try.

"You don't hear Durden ranting against the resource wars and empire, my first test to mark the "good" libertarians from the "bad" ones."

When the Libyan invasion was first getting underway, I remember his posts were quite critical of the whole charade, motives and all. That's what is frustrating, though. Even some very intelligent people such as TD have begun sacrificing these common sense observations for the sake of promoting Austrian free-market principles, the divisive and derisive properties are probably best exemplified by FOFOA's "debtors vs. savers" dichotomy. All of a sudden, Germany is huge victim in all of this, while the Greeks are just lazy hucksters that have stolen (or are trying to steal) productive German wealth without complying with any of the austerity conditions. It's all just completely polarized, short-sighted thinking right now. And if there's anything that the bankster elites want within the critical population at this stage of the game, it's that.

bosuncookie said...Jal, I get the joke and I like it. It's kind of a funny play on words and concepts. What I don't get is the connection with either of our related comments. The only connection I see actually bears out my point. (How convenient, right?) Help me see your connection, please. ---On a good day, I have trouble thinking ... and that is without mind alteration helpers.

The edit key has moved us into an alternate universe.Let's accept it and look forward to good vibes.

I do not feel that I should carry chips on my shoulders as I head towards the golden gates.

Even some very intelligent people such as TD have begun sacrificing these common sense observations for the sake of promoting Austrian free-market principles

Perhaps we could stick them all on an Islands?

http://theweek.com/article/index/218393/libertarian-island-a-billionaires-utopiaHow would Libertarian Island work?At first, the new city state would be built on mobile, diesel-powered floating platforms that house up to 270 residents, but Seasteading chief Petri Friedman hopes to have tens of millions of residents living on hundreds of banded-together platforms by 2050. Within a few decades, the goal is to establish United Nations–recognized sovereign nations that get their food and energy from trading with other countries.

An interesting discussion. And yes, as you mention, Hudson seems to echo some of the opinions of TAE regarding the coming Greater Depression. But Hudson also says that this Depression would be avoidable if not for the neo-liberal ideas of the US administration. I suppose I can't help concluding that he's wrong, and that while the depression is coming, it is NOT avoidable. All that one can do is choose WHERE the most pain will be dealt. Given that we are in the mess, it seems like more hubris for Hudson to conclude that HIS insights could save the US/world from a Greater Depression. What do you think?

Talk about hanging crepe. We must be near the bottom in this recession. This is reminiscent of some of the "Stocks are Dead Forever, RIP" articles I read back in the early 80's when the Dow was near on par with the gold price. Sure, things were tight back then, but I didn't see any mass starvation in the USA. Even though unemployment was at 10% of the workforce, 90% were still working. And interest rates were at 14% back then!

Long live the success of socialism so that it can continue to save capitalist bankers who want to drive everyone into poverty.http://www.zerohedge.com/news/g7-issues-communique-tackling-slowdown-supporting-banks-says-central-banks-ready-provide-liquid

Is Stoneleigh still standing by her call that there will be no more QE? Why no reply?

Simple question, and important too, given the developments and back-room-deals going down this weekend.

I think I called it pretty well last week when I said:

SEPTEMBER 5, 2011 8:18 AM CharlieRose said...

My prediction (not an endorsement): Global QE is near.

G7 meets next weekend. Expect an announcement before markets open on September 12th. Bank of Japan, People's bank of China, Bank of England, and Fed -- all of them holding hands in a coordinated global burst of liquidity.

The ECB will lower rates and commit to secondary market debt for sustained periods. It will consider expansion to the primary market.

Pain focuses the mind. Eurobonds are coming.

Stoneleigh: Did you predict last week that there would be no more QE? I think you did.

"Long live the success of socialism so that it can continue to save capitalist bankers who want to drive everyone into poverty."

Why are so many confusing socialism with what is really theft? As I see it, all that does is tar socialism with this aspect of capitalism, it shifts the blame and confuses rather than brings any clarity to issues.

Protesters broke into the Israeli Embassy in Cairo Friday and dumped documents out of the windows as hundreds more demonstrated outside, prompting the ambassador to rush to the airport to leave. The unrest was a further worsening of already deteriorating ties between Israel and post-Hosni Mubarak Egypt.

Egyptian police made no attempt to intervene during the day as crowds of hundreds tore down an embassy security wall with sledgehammers and their bare hands or after nightfall when about 30 protesters stormed into the Nile-side high-rise building where the embassy is located.

"But Hudson also says that this Depression would be avoidable if not for the neo-liberal ideas of the US administration. I suppose I can't help concluding that he's wrong, and that while the depression is coming, it is NOT avoidable. All that one can do is choose WHERE the most pain will be dealt. Given that we are in the mess, it seems like more hubris for Hudson to conclude that HIS insights could save the US/world from a Greater Depression."

---

Well, I've encountered very few adult human males who do not have all THE answers to the worlds problems, so I won't hold that against him.... ;)

I have noticed other writings of his linked here, occasionally by Ilargi, but most often by various commenters.

The worldview of TAE does not seem to fit conveniently into the left/right, socialist/capitalist divisions most people are comfortable with. And suggesting that some processes and situations ("The Unbearable Mightiness of Deflation" for example) are beyond control of "humanity" (whatever that is entity is?) is guaranteed to offend both the "left" and "right", as both groups usually beleive in their own flavour of perpetual progress.

I mention this because I can sometimes get "lefties" (most of my surviving family) to read a Michael Hudson discussion about the "financial class" enslaving the "working class" through asset price inflation and personal debt, when the same individuals will reject TAE as being fatalistic and defeatist. (I've spent most of my working life in technical/engineering types of environments, and never initiate discussions of these types of issues with these occasionally "rightist" but usually just techno-optimist associates, but occasionally point to a zerohedge article if the subject arises).

I am in no way suggesting TAE should compromise their worldview to reach a broader audience.

Thanks for the link, his sexual analogy to O'bumma's speech really was funny. But I am totally uninterested in the Usanistani presidential "race." Would rather watch professional wrestling - more honest and better makeup. I do not root for color teams, neither red nor blue, crips nor bloods. For me the only proper use of the words left and right is to try to figure out which shoe goes on which foot in the morning, which is becoming more difficult as the years roll by. I do however like the use of the words fascist, corporatist, and crony capitalist.

Yeah, I like the rude one's irreverent humor. Btw, I probably have less interest in the next election than you do and I still reside in the Empire's homeland. Is that painting you linked to foretelling the bankster's just reward?

We have a certain level of decorum as to how we address each other here. If you cannot abide by it, take your commentary to The Fight Club.

Apologies, 2 pints of good yankee bourbon makes the tounge a tad loose. Hey, it was friday night.

Speaking of which, Drugs are Bad MmmmKay. A good friend and fellow musician, still alive and well, made a classic comment after we saw a TV news item one day in the recording studio, some teen had died in the gutter after a drug overdose.

Nothing to apologise about - it is important to not take everything at face-value. Personally, I could not work out to whose advantage any such changes would have been.

There is one thing that does distinguish the Spanish Civil War from the US version - it was a war that split many families right down the middle. A great number of brothers were fighting on opposing sides, for example. IMHO, it is impossible to understand Spanish sensibilities without keeping that in mind. It used to be a brake on their political urges so it will be interesting to see how it works out.

As usual this time of the year I am behind reading blogs as there are so many things to do on a farm. Right now I am clearing brush and bramble on a piece of our land that is in a valley normally full of seeps and springs. But what with the continuing drought is stone dry now.

"1) I'm still looking for answers, too. I've got bits and pieces, here and there, but it's an ongoing process.

2) Don't be afraid."

I agree, I have been telling my children the same thing for a long time.

I have repeatedly told them that a major change is coming and that they must be prepared with a good work ethic and a skill that will keep them employable when TSHTF. Both boys have chosen directions that puts them in a pretty good position for the coming changes.

I also emphasized the importance of not being afraid. I told them that they will do just fine because they are smart, ethical and full of good qualities that will allow them to endure the changes in a satisfactory manner.

I have also told them that when we (parents) are gone they should do everything they can to keep the farm because there may be a time when things get really bad where they may need it as a (hopefully temporary) place of last resort.

The world has had constant crises and people always rise to endure. Of course resource depletion and over population will make the coming changes permanently difficult. However inspite of this, the honest and resourceful will endure. Man has been enduring since he evolved. What I do not tell them is that there is some (perhaps a great) chance of nuclear conflagration that could change the whole picture.

“Turning Japanese” was a classic one-hit wonder by The Vapors in 1980 and three decades later it is certainly not music to the ears of US policymakers and debt-strapped households as the world’s largest economy struggles for traction.

The bursting of Japan’s debt bubble in the early 1990s heralded years of deflation and subdued growth, in spite of endless fiscal and monetary stimulus efforts.

During this recent disfunctional market, my husband and I have been backing up the truck and loading up on dividend paying stocks.

If the stock price falls, our dividend yield goes up, so we make more per share. We make better returns even when the sun don't shine. You've got your Colgates, your Clorox, your Eastman Kodak. No matter what, people still clean their teeth at dusk and dawn, scrub their kitchen floors, and fill up the family photo album with memories that last. You stick with the brands that have stood the test of time.

"With the Fed determined to stop the US from sliding into deflation, an eventual recovery slowly beckons as households rebuild their savings and home prices stabilise.And “Turning Japanese” will simply remain a 1980s pop music artefact."

All of which leaves the Fed with the task of boosting the economy, as fiscal measures face the ranks of austerity hawks in Washington.

True to form, bond traders have ignited Treasury prices and sent yields sharply lower over the past month as they bet the Fed would undertake further easing, most likely involving purchases of long-term debt.

Cheryl,

I linked that FT article because I find it hilarious to see the crap they now put in print in "respectable" newspapers. When has any central bank "boosted the economy" in any real sense?

It is a "cargo" cult - build the models of planes, and the goods will fall from the sky. So infantile.

"In the South Seas there is a cargo cult of people. During the war they saw airplanes with lots of good materials, and they want the same thing to happen now. So they've arranged to make things like runways, to put fires along the sides of the runways, to make a wooden hut for a man to sit in, with two wooden pieces on his head to headphones and bars of bamboo sticking out like antennas - he's the controller - and they wait for the airplanes to land.

They're doing everything right. The form is perfect. It looks exactly the way it looked before. But it doesn't work.

The problem of psychopathic behavior in Homo Sapiens goes back a long long, time. I personally believe it's baked into the human cake and is an integral part of the core nature of homo sapien as a hominid species.

The authors end the book with:

"...Yet it is unrealistic to believe that humans were peaceful and innocent in the distant past either. Keeley says that to idealize prehistoric humans is to dehumanize them. Archeological evidence and subsequent historical facts have both shown that Homo sapiens has continually ﬂuctuated between better and worse states of existence throughout its already long history..."

I've always said that about the world. Just too much human nature. The more humans, the more human naturalness to ruin things. Unfortunately baring a disaster, the natural trajectory of the demographic transition will be adding more and more human nature to screw things up for another couple decades. Before population levels off and lowers the level of vile, societal ruining human naturalness on the planet.

To make matters worse, as economic conditions deteriorate, we are going to get overwhelmed with human nature. The ruling class will naturally get more ruthless to preserve the system that gives them privilege - which is totally natural. The people that get deprived of survival needs will also unleash a wave of human nature that we are naturally going to have to suppress.

Obviously, we are going to have to take drastic measures to protect against the massive amounts of human nature coming our way.

The question is, what can we do to stop this inevitable wave of socially corrosive human nature on the horizon?

I have been watching a 1964 epic film " The Fall of the Roman Empire ". Of note is the historian ' Will Durant " was a collaborator. During debate in the senate over whether to give the barbarians Roman citizenship ( illegal aliens anyone?) the question is asked, " When does an Empire die?" A senator holds that an Empire dies when people no longer believe in it. What we perhaps name loss of confidence.The film ends with Levius walking away from the offered crown while in the background the bidding to be the next Caesar begins. And what is the highest bid for the Presidency to-day? I've heard some staggering figures.

The author of Cannibals and Kings, Marvin Harris, doesn't label social characteristics as morally good or bad. He regards his role as one to observe and try to understand the connections. There are things about many hunter gatherer societies that would turn off the modern, "enlightened" person ( Dick Cheney excluded). They, for the most, part practiced war, either with neighboring clans, or in the case of the Iroquois, clans hundred of kilometers away. They were male dominant with many practicing female infanticide either overtly or passively. They often practiced torture as part of warfare (thought apparently not water boarding). Harris explains these customs as social structures to avoid destroying their fragile resource base by over use.

What these societies did not have was economic exploitation. They were extremely egalitarian and no one was forced to hand over their surplus to another. This was often done voluntarily in the form of clan feasts however, which would raise the social status of the donors. The donors were organized under "big men," but their efforts were totally voluntary. As an agricultural city state developed the Big Men morphed into an aristocracy. The book is a very worth while read. The economic status of these clans were arranged largely through reciprocity relationships between individuals. Harris doesn't deal with psychopaths as we know them today, but it would be a safe bet that this type of behavior was not allowed and they were liquidated either directly, or through exile which would amount to the same thing.

DIYer - thanks for the heads up to Jesse's essay. Not only does modern society allow psychopathy but it actively encourages it. Anyone with four functioning gray cells can read that corporation in Usanistan are legally coerced into psychopathic behavior at the risk of being penalized by the legal system. As with most other behavior, we also encounter the nature / nurture issue. IMHO, the best fictional modern depiction of a psychopath was that of Cathy Ames in John Steinbeck's East of Eden. Here is a brief summary of her from a somewhat lacking Wikipedia entry:

"Cathy is described as having a "malformed soul"; she is cold and calculating, prone to violence, and uses her sexuality to manipulate and control men. She leaves home one evening after setting fire to her family's home, killing both of her parents. Finally, she is viciously beaten by a pimp and is left close to death on the brothers' doorstep."

Steinbeck describes her "malformed soul" in an almost physical sense as if she were born missing certain organs.

But one can also surmise that psychopathy can be a matter of family values. For example, the entire Rockefeller clan appears to be psychopathic. Aaron Russo paints a startling picture of this in his retelling of his relationship with Nicholas Rockefeller. The ubiquity of the trait in the Rockefeller clan denies a strictly genetic causal factor. The Rothschild clan is probably the same though we do not have as clear insight into it.

I loved the following quotation from Jesse's article. Note that Jesse is quoting another here.

"How can you tell if your boss is a psychopath? It's not easy, says Babiak. "They have traits similar to ideal leaders. You would expect an ideal leader to be narcissistic, self-centered, dominant, very assertive, maybe to the point of being aggressive. Those things can easily be mistaken for the aggression and bullying that a psychopath would demonstrate. The ability to get people to follow you is a leadership trait, but being charismatic to the point of manipulating people is a psychopathic trait. They can sometimes be confused."

Ideal leader? Geboren Führer? Do I detect some unintentional irony by this Babiak "scholar?"

See:

http://www.zerohedge.com/news/if-hitler-was-goldbug

Note: Not as much fun if you speak fluent German as the subtitles have no connection with the original video.

Speculation had swirled in some quarters that G7 central bankers might flag a coordinated monetary stimulus involving quantitative easing, but a second G7 delegate said that possibility was not even discussed.

"It is not realistic for the market to expect us to put hundreds of billions on the table every time we meet," he said.

bosuncookie: "It is not necessary to use chemicals to reach a non-ordinary state of consciousness that sees the world clearly."

Not strictly, technically necessary -- but a tremendous help, and may be (surely IS) indispensable for many, probably most. Which may be why they are so integral to traditional cultures, for untold millennia.

See this great and vast site:http://www.egodeath.comEgo Death and Self-Control Cybernetics

http://ponerology.com "discussions in moral philosophy - the study of right conduct - have failed to systematically investigate the origin, nature, and course of evil in a manner free from supernatural imaginings."

http://ponerology.blogspot.com"Ronson [asked] if it could really be true that psychopaths rule our world, that they shape the form and function of our society. Could this simple, yet radical, idea explain it all? From the 'brutal excesses of capitalism itself' to the utter callousness of profiting off the destitution of entire industries?"snip"Andrew Lobaczewski's Political Ponerology...just barely made it out of Communist Poland, the first copies destroyed, stolen, and lost and its researchers hunted, arrested, tortured, killed, and silenced. Lobaczewski survived long enough to write the book from memory and contact a publisher who recognized the importance of what he was saying: yes, psychopaths rule the world, and this is how it works."

http://web.archive.org/web/20080614172748/http://www.cassiopaea.org/cass/official_culture.htmOfficial Culture in America: A Natural State of Psychopathy?snip"the American way of life has optimized the survival of psychopaths with the consequence that it is an adaptive 'life strategy' that is extremely successful in American society, and thus has increased in the population in strictly genetic terms. What is more, as a consequence of a society that is adaptive for psychopathy, many individuals who are NOT genetic psychopaths have similarly adapted, becoming 'effective' psychopaths, or 'secondary sociopaths.'"

....................

Consider all this very carefully before drawing conclusions about "human nature". The bulk of the mayhem attributed to "human nature" IS indeed human nature: the nature of a small fraction (perhaps 3%) of humans who are psychopathic.

All:Pardon the hiatus, which I'm sure was deeply regretted by all. Haha. I haven't forgotten the questions asked of me; all will be answered in good time. I ran into some problems, external and internal/personal. External included a longish power outage -- which convinced me that I am wrong about everything and that industrial civilization really IS collapsing. Haha. Another problem is technical: damned blogger is such a flaky platform; it is impossible to give a full-length answer to anything because blogger wants to truncate at some absurdly short wordcount; formatting is terrible, unusable; you cannot edit your posts; etc, etc. So I've got to solve the technical problems (find some other platform that I can live with) first; I refuse to struggle with blogger for anything more than the briefest comments. Which raises the question: why this flaky platform for a rather large, well-trafficked blog like TAE? Why not wordpress or something more sophisticated? Just a thought. Not that wordpress or others are without sin.

The trouble with talking on the internet is that so much misunderstanding occurs as dialogue can be so interrupted as to become often almost meaningless.

Just happened to notice this from you:

"I would be very wary of investing in equities which have a history of paying good dividends once the crash is underway "

I quite agree, read my response to a statement by Cheryl above.

I may not be as sanguine as Stoneleigh possibly is about the ultimate crash being next on the agenda. There could be one more sticksave out there. Just don't know.

That aside, if I were to invest in dividend bearing stocks it would not be now. I suppose if one feels they need cash flow and expect a stock, say in energy, to eventually recover it might be a suitable strategy, but for my part I am holding Can dollars and gold in my savings and a S----load of canning jars in my basement (mostly filled for the season). This latter investment I would heartily advise to country or city dweller alike. I could go on about that one for a bit but seriously if one figures the bottom is going to fall then learn canning, and get the equipment to do it. If no collapse occurs the worst that can happen is you end up with a bit of useless knowledge and maybe a basement full of surplus food, what a tragedy!

jal quoted: "There is no way to prepare the next generation for that kind of future." but the generation after that will be somewhat prepared and about the third generation will find this not unusual at all.

My mother-in-law got to East Texas in circa 1910 in a covered wagon pulled by mules and she saw men on the moon. She remembers the 1917-18 flu season where have the people in her small town died. Think about her transition.

I remember some of the depression though I was quite young. We listening to the Joe Lewis fights on the radio. My grandkids see video on their cell phones.

The transition down the slope will be rapid but in a couple generations will not seem strange. It is almost inconceivable what has happened in the last 125 years.

Alan2102Another problem is technical: damned blogger is such a flaky platform; it is impossible to give a full-length answer to anything because blogger wants to truncate at some absurdly short wordcount; formatting is terrible, unusable; you cannot edit your posts; etc, etc

You might want to consider blogging instead. It's becoming a problem for hundreds of readers to scroll over some lengthy agglomerations of words.

On another subject: Here in the Reno area there is a little movement to make a separate library of craft books (metal working, wood working, distillation, etc.) When there is a money crunch in the community, libraries are often the first to not get funded. It's a step in this transition.

"Yet we kill and demonize those saints and let the demons run amuck..."

Although I don't agree with the "free market libertarian" foundations of people like RD Laing and Thomas Szasz, as psychiatrists they provided some good insights into the institutional, coercive nature of modern medicine. The language we use is, of course, a critical factor.

"The struggle for definition is veritably the struggle for life itself. In the typical Western two men fight desperately for the possession of a gun that has been thrown to the ground: whoever reaches the weapon first shoots and lives; his adversary is shot and dies. In ordinary life, the struggle is not for guns but for words; whoever first defines the situation is the victor; his adversary, the victim. For example, in the family, husband and wife, mother and child do not get along; who defines whom as troublesome or mentally sick?...[the one] who first seizes the word imposes reality on the other; [the one] who defines thus dominates and lives; and [the one] who is defined is subjugated and may be killed." -Dr. Szasz

I&S announced quite some time ago having hired a web designer (with their limited budget), and we are all awaiting its eventual maiden voyage. After numerous disasters, I never write directly into blogger. I have a Mac and find its Mail app convenient. I also think that one runs a danger here of being overly wordy and prolific, and have people skimming or just scrolling through one's comments, though I probably should not be writing this as being a major offender in this department.

CharlieRose

Stoneleigh is currently touring (Scandinavia I believe) and giving presentations. You might consider forgiving her if responding to your very aggressive and combative challenges do not top her priorities list.

Secular animist said: "...You can track Imperial conquest back to about 5000 BC when the Indo-Europeans came out of southern russia and transformed the world. Transforming egalitarian, early civilizations to hierarchical war based societies....

Sorry, but this is simply utter crap. There is, among both linguistic and archaeological experts, nothing more than the widest speculation about the geographical origins of the Indo-European peoples. Anyone who claims to know with certainty where the I-E's came from is raving or angling for tenure somewhere. Further, the early civilizations they would have run into c. 5000 BCE (Sumer, Egypt) had they originated in "southern Russia" were well on their way to becoming war-loving hierarchical societies on their own terms. Nor is there the least trace that they were influenced by Indo-European peoples at that time. There are few archaeologists who would even assign the term "civilization" to any group or culture existing in 5000 BCE. Writing had not yet been invented at that time.

The more egalitarian, non-hierarchical, contemporary non-civilizations that existed outside of Egypt and Mesopotamia were all pretty much swallowed up, sooner or later, by those empires, along with many weaker neighboring hierarchies.

You wrote that--as far as nono-ordinary states of consciousness-- chemicals are...

Not strictly, technically necessary -- but a tremendous help, and may be (surely IS) indispensable for many, probably most. Which may be why they are so integral to traditional cultures, for untold millennia.

My interest is in seeing the world clearly without the aid of crutches. I suppose a crutch may be necessary in many cases, but I am interested in walking without crutches. What happens when the chemicals are unavailable? Those who can see clearly without chemicals will be more grounded in a fundamental "happiness" than those who must rely upon chemicals.

The techniques of clarity and liberation developed 2,500 years ago require no externals other than access to the techniques and a certain degree of quiet and minimal material comfort.

There are many places on the earth where mushrooms, peyote, etc. are unavailable. People who live in these locales may still be free. Here is a hypothesis that I cannot really support: Entheogens are but one early stage in the evolution of human consciousness.

There is, among both linguistic and archaeological experts, nothing more than the widest speculation about the geographical origins of the Indo-European peoples. Anyone who claims to know with certainty where the I-E's came from is raving or angling for tenure somewhere.

Admittedly, I going back almost two decades. But I was specifically referring to Marija Gimbutas's - Kurgan Hypothesis.

Further, the early civilizations they would have run into c. 5000 BCE (Sumer, Egypt) had they originated in "southern Russia" were well on their way to becoming war-loving hierarchical societies on their own terms

Understood

There are few archaeologists who would even assign the term "civilization" to any group or culture existing in 5000 BCE. Writing had not yet been invented at that time.

Understood as well. They may label it early-civilization. Or make some other distinction like that. Though, there are settlements going back to about 7500 BC with populations in the thousands with primitive technology and complex living arrangements. Catalhuyuk, in Turkey I believe is the most famous. According to wikipedia it had a population of up to 10000.

The more egalitarian, non-hierarchical, contemporary non-civilizations that existed outside of Egypt and Mesopotamia were all pretty much swallowed up, sooner or later,

El G: "I&S announced quite some time ago having hired a web designer (with their limited budget)"

That's very nice, but I hope they are not paying for stuff that already comes free. Wordpress is the premier free and easy (reputedly) alternative to blogger, but there's also Drupal and others. Wordpress offers threaded discussion (huge!), edit of posts after posting, and other features. The format is a lot better.

There's also the possibility -- perhaps preferable -- of dumping the comment feature entirely and moving discussion to a forum, e.g. http://www.simplemachines.org

Numerous or all of the problems with blogger would thus be solved.

"After numerous disasters, I never write directly into blogger. I have a Mac and find its Mail app convenient."

Emailing posts does not solve the primary problems (truncation, threading, editing, format). Your "disasters" were, I am guessing, the loss of your text while editing, or upon attempting to post. This is an inexcusable software flaw that should have been fixed decades ago. Actually, it WAS fixed decades ago; then the fix was forgotten by a new generation of relative idiots.

p01: "You might want to consider blogging instead. It's becoming a problem for hundreds of readers to scroll over some lengthy agglomerations of words."

Sorry, but I cannot apologize for that. Discussion of challenging and complex topics cannot help but run to many words. Brevity is great, but not when it results in sound-bite shallowness. Nevertheless, I might take your suggestion for practical/technical reasons.

bosuncookie:"My interest is in seeing the world clearly without the aid of crutches. I suppose a crutch may be necessary in many cases, but I am interested in walking without crutches."

I generally don't buy the prejudice against "artificial crutches". Everything is an artificial crutch. The Lotus posture is an artificial crutch. Breath control is an artificial crutch. That said, it is also true that simplicity and local access (and related things) are virtues, and that complexity and expense (confused with "artificialness") can get out of hand quickly.

"What happens when the chemicals are unavailable?"

They are never unavailable, except under extraordinary and ridiculous circumstances such as living in a fascistic drug-war-crazed society.

"The techniques of clarity and liberation developed 2,500 years ago require no externals other than access to the techniques and a certain degree of quiet and minimal material comfort."

Yes. And many of them don't work worth a damn for 95% of the Western people (and perhaps others, I don't know) who attempt them. See the articles to which I referred on the egodeath site. They might work for things like stress control and general mental health improvement, but for really delivering transformative religious experience, they suck, for the great majority of people who attempt them.

Although I recognize that most of you have a solid understanding of the root causes and symptoms of monetary deflation the following link to an 8 part lecture ( 80 minutes) by Irving Fisher on youtube is a brilliant piece for experts and newbies alike!

They are never unavailable, except under extraordinary and ridiculous circumstances such as living in a fascistic drug-war-crazed society.

In the USA, don't we presently live in a "fascistic drug-war-crazed society?" And doesn't this therefore render entheogens generally unavailable to most folks?

If so, then other, time-tested methods are available. I'm not suggesting the Buddhist methods of investigating the true nature of reality are easy or quick: all I'm saying is that they don't require externals--such as a fresh supply of chemicals--in order to start down the path of taming the mind.

My understanding of entheogens is that their effects are contingent upon being under their direct, biological influence. Not having used entheogens, I'm ignorant about their lingering effects for the creation of a permanent relationship with life that is grounded in equanimity, wisdom, and compassion, regardless of externals. (Including the necessity to ingest something.) But that is what I'm after.

If there was a pill that could do that, I would buy it and take it; I don't think it exists. It is certain that "pills" that claim to do this are certainly marketed. I'm not sure where enteogens fall in this regards. Are the effects of entheogens available after one stops ingesting them? Don't know, more study required. (Thanks for the site, BTW.) But if those effects are not available after one stops taking them, then they are merely crutches, spurs, or hints about possibilities. I'm not after a hint; I'm after the realization in everyday life, free from chemical aids.

"My understanding of entheogens is that their effects are contingent upon being under their direct, biological influence."

It struck me, therefore, that if any of the psychedelic chemicals would in fact predispose my consciousness to the mystical experience, I could use them as instruments for studying and describing that experience as one uses a microscope for bacteriology, even though the microscope is an "artificial" and "unnatural" contrivance which might be said to "distort" the vision of the naked eye. However, when I was first invited to test the mystical qualities of LSD-25 by Dr. Keith Ditman of the Neuropsychiatric Clinic at UCLA Medical School, I was unwilling to believe that any mere chemical could induce a genuine mystical experience. At most, it might bring about a state of spiritual insight analogous to swimming with water wings. Indeed, my first experiment with LSD-25 was not mystical. It was an intensely interesting aesthetic and intellectual experience that challenged my powers of analysis and careful description to the utmost.

Some months later, in 1959, I tried LSD-25 again with Drs. Sterling Bunnell and Michael Agron, who were then associated with the Langley-Porter Clinic, in San Francisco. In the course of two experiments I was amazed and somewhat embarrassed to find myself going through states of consciousness that corresponded precisely with every description of major mystical experiences that I had ever read.2 Furthermore, they exceeded both in depth and in a peculiar quality of unexpectedness the three "natural and spontaneous" experiences of this kind that had happened to me in previous years.

Through subsequent experimentation with LSD-25 and the other chemicals named above (with the exception of DMT, which I find amusing but relatively uninteresting), I found I could move with ease into the state of "cosmic consciousness," and in due course became less and less dependent on the chemicals themselves for "tuning in" to this particular wave length of experience. Of the five psychedelics tried, I found that LSD-25 and cannabis suited my purposes best. Of these two, the latter—cannabis—which I had to use abroad in countries where it is not outlawed, proved to be the better.

For clarification, I am not interested in "cosmic consciousness." In fact, I don't even know what that means.

I am interested in a relationship (with the events of my life) that is characterized by equanimity, wisdom, compassion, and skillful response to the contingencies of life without regard for the character of those contingencies. Nothing more, nothing less.

And to elaborate, my definition of "skill" means to not be a source of unnecessary suffering for myself or other life forms.

At this particular point in my life, I believe in material interdependence and the interdependence of the consequences of living and acting, but not of psychic connectedness. I've read about it, but never experienced it. The "reality" of cosmic consciousness is not an important question for me right now. Too much wood to chop and too much water to carry. That--on top of trying to wake up--is just about all I can manage!

scrofulous America is still in power and when you have countries like Nigeria, Iran Russia,China making deals amongst themselves than this would be inviting military confrontation. I wont be surprised if we have troops in Nigeria ,Iran.Like a mad man out of control they will continue this way for 2-5 years and than who knows what will happen.So again Max is talking the truth but some details are missing

Secularanimist, Gimbutas deserves a lot of respect. But her Kurgan hypothesis is still considered quite speculative, and there are significant challenges to it. Granted, it's holding up well for a 50+ year-old theory. That's at least in part because there is so very little real evidence to support or contradict either it or any other theory.

Scrofulous, in archaeology the defining features of civilization are generally considered to be:

Not that this definition works in every instance. We can certainly debate what exactly constitutes a civilization, probably ad nauseum. I would posit that the usage common here at TAE - cultures featuring an exploitative relationship between center and periphery - generally would not exist without most or all of the above features.

scrofulous said...David Graeber talking about the history of money and debt on Max Keiser in second half.Excellent, a must watch, IMO.

Truly eye-opening, and gives me an urge to go max-out all my credit cards and take all the mortgages and credits I have been avoiding like a plaque. (I'm not kidding, I mean if it's going to be a jubilee, I might as well have something to be "jubilee-ed" of, no?).

Bosuncookie:The experience of what is called "cosmic consciousness" (also called a bunch of other things) leads almost inevitably to behavior in life that is characterized by equanimity, wisdom, compassion, and skillful response to contingencies -- or at least somewhat MORE equanimity, wisdom, etc., than you were capable of mustering before. In other words: not a miracle pill, overcoming all character limitations and defects, but awfully darn good.

But if you're looking for permanence, you won't find it in or through drugs, meditation, Yogic practices, or anything else on this earth. Everything is temporary, here.

Also: Yes, of course the U.S. is a "fascistic drug-war-crazed society"; that was my point, intended to elicit a laugh of recognition. But, even in the face of that repression, entheogens are still available to most people, most of the time.

Another moment on TAE where I have to slap my head at the audacity of the generalization:

The experience of what is called "cosmic consciousness" (also called a bunch of other things) leads almost inevitably to behavior in life that is characterized by equanimity, wisdom, compassion, and skillful response to contingencies -- or at least somewhat MORE equanimity, wisdom, etc., than you were capable of mustering before.

I read pretty widely, but I haven't read much that supports this. In fact, much of what I read warns against "tasting" the experience without continuing to work on the basics of thought patterns, view, and habitual response. Why? Because the blissed-out state often becomes a desirable end unto itself. In short, another form of escape. I'm not in to escape. At least for now. ;-)

I'm sure that there are probably several reports of individuals that--having used entheogens--wind up generally being more at-one, at peace with the vagaries of life. But does the experience of "cosmic consciousness" (your term, not mine) "lead almost inevitably" to those cited behaviors?

Don't know, don't really think so. But IF so, it makes the pill even more valuable! I remain skeptical, however.

cookieguy:"much of what I read warns against 'tasting' the experience without continuing to work on the basics of thought patterns, view, and habitual response."

Did I say something about not continuing to work? No. I said that THERE IS NO MAGIC PILL. But there are aids. Just like Yogic asanas are an aid.

Work is always a good idea.

"does the experience of 'cosmic consciousness'...lead almost inevitably to those cited behaviors?"

Yes. Deep, authentic insight leads to inner change which is, almost invariably, reflected to some extent in one's behavior. The degree and duration of the behavioral changes depends on numerous variables, and imponderables.

http://www.cnn.com/2010/HEALTH/09/06/magic.mushrooms.ease.anxiety/index.html Terminally ill cancer patients struggling with anxiety may get some relief from a guided "trip" on the hallucinogenic drug psilocybin, a new study suggests.The study included 12 patients who took a small dose of psilocybin -- the active ingredient in "magic mushrooms" -- while under the supervision of trained therapists. In a separate session, the participants took a placebo pill, which had little effect on their symptoms.By contrast, one to three months after taking psilocybin the patients reported feeling less anxious and their overall mood had improved. By the six-month mark, the group's average score on a common scale used to measure depression had declined by 30 percent, according to the study, which was published in the Archives of General Psychiatry.Can psychedelic drugs treat depression?In follow-up interviews with the researchers, some patients said their experience with psilocybin gave them a new perspective on their illness and brought them closer to family and friends.

http://www.environmentalleader.com/2011/09/08/rec-unveils-pv-panel-with-one-year-energy-payback/September 8, 2011REC Unveils PV Panel with One-Year Energy Payback"Solar energy firm REC says it has developed a photovoltaic panel that, within one year, generates the same amount of energy used to create it...."snip

"scrofulous America is still in power and when you have countries like Nigeria, Iran Russia,China making deals amongst themselves than this would be inviting military confrontation."

Gee Jack, what are you talking, nukes or back to the cold war? I am sure you must have seen Princess Bride and learned of the futility of a land war in Asia? ;)

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PO1 You say:

"Truly eye-opening, and gives me an urge to go max-out all my credit cards and take all the mortgages and credits I have been avoiding like a plaque."

That reminds me of a School principal who I lived next door to years, maybe eons, ago. He said he wanted to die owing a million bucks as he would have had the use of that money for nada ... timing, I think, is an essential feature in that sort of plan! ;)

"...Earlier this week a study by the European Photovoltaic Industry Association claimed that, as manufacturing costs continue to fall, solar power could become competitive with grid electricity in some European markets as early as 2013."

Too bad, by 2013, Europe's financial condition will be a smoking pile of ash and cinder blowing in the wind. Not really ideal for financing much of anything, least of all solar panels.

Maybe they can barter with Jack and his magic beans for photovoltaics..

thomas eicher needs to get a life. but for the record i distinctly remember heart-rendering, FB. i'm quite sure the mistake has been corrected and to dubious effect. (opinions are like assholes everyone's got em.)